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Navistar Shining Brighter With Goldman Upgrade

Navistar International Corporation NYSE:NAV, PACCAR Inc. NASDAQ:PCAR - Navistar Shining Brighter With Goldman Upgrade

The recent capital injection from Volkswagen AG (ADR) VLKAY 1.31% OTCVOLKPY earns Navistar International Corp NAV 3.29% an upgrade from Goldman Sachs to Neutral from Sell, as the truck maker's liquidity risk is now "meaningfully reduced."

Justification

Volkswagen's investment improves the liquidity profile of Navistar, Goldman Sachs' said, which provides "an incremental $256 million of equity capital compared to our estimate of future used truck trade-in losses of $250 million–$300 million." This is based on losses of $20,000–25,000 per vehicle in the existing fleet, which has resulted in "the bonds trading up to par."

As such, Goldman Sachs raised its mid-cycle margin estimate by 250 bps to 9 percent, which would still lag peer PACCAR Inc PCAR 2.38%'s 11 percent margins due to PACCAR's structurally higher capital velocity.

Related Link: Volkswagen's $256 Million Investment Adds $600 Million To Navistar's Market Cap

On The Sidelines

"Our new mid-cycle estimates of $3.72 in EPS and $1.16 billion in EBITDA are based on a 9 percent EBIT margin, which includes 250 bps of benefit from reduced material sourcing costs. If Navistar's turnaround proves successful, we estimate margins of 9 percent," analyst Jerry Revich wrote in a note.

However, the brokerage remains sidelined, citing market share risk.

"While we are positive on management's actions to improve the product portfolio, continued deterioration in used equipment values for Navistar trucks manufactured under the prior management team creates risk of lower normalized market share, in our view," Revich highlighted.

The Bottom Line

Despite the challenging near-term U.S. truck capex outlook, the analyst hopes that electronic logging standards set to be implemented in 2018 would drive a 4 percent reduction in available supply and freight price.

As such, Revich stated, "[T]he near-term risk-reward is balanced, with upside from an operational turnaround offset by the risk of rising legacy liabilities and market share loss."

The analyst raised his target price to $20 from $2 to reflect expectations of structurally higher margins than prior cycles stemming from the Volkswagen investment. The new $20 price target implies 5 percent upside versus +7 percent median for Goldman Sachs coverage.

At time of writing, Navistar was seen at $19.54, up 2.2 percent on Friday.

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DateFirmActionFromTo
Sep 2016Deutsche BankMaintainsHold
Sep 2016BairdMaintainsNeutral
Sep 2016Goldman SachsUpgradesSellNeutral

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