Is Navistar Destined for Greatness?

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Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Navistar's (NYSE: NAV) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Navistar's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Navistar's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Navistar's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Navistar managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Navistar's key statistics:

NAV Total Return Price Chart

NAV Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue Growth > 30%15.1%Fail
Improving Profit Margin627.0%Pass
Free Cash Flow Growth > Net Income Growth(82.8%) vs. 112.8%Fail
Improving Earnings per Share106.0%Pass
Stock Growth + 15% < EPS Growth(51.6%) vs. 106.0%Pass
Improving Return on EquityNM**Fail
Declining Debt to EquityNM**Fail

Source: YCharts. * Period begins at end of Q2 2009.
** NM = not material due to negative equity.

How we got here and where we're going
Navistar's anemic cash flow and negative equity contribute to a weak score, earning the company only three out of seven possible passing grades. Navistar's lack of dividend restricts it from judgment on those merits, but with this rate of progress, it's probably best that there isn't one, as it'd likely be unsupportable at current free cash flow levels.

Navistar's had a rough go of it for some time now, battling with PACCAR (Nasdaq: PCAR) over a weak heavy-duty-truck market. The company's latest earnings showed an adjusted net loss, which was balanced out by a one-time charge similar to the one that sent the company's net income artificially soaring last year. The softening market has become so uncertain that Navistar suspended guidance for the rest of the year.

The company's new CEO replaced one who earned Fool contributor Sean Williams' "CEO Gaffe of the Week" award. Sean notes that "it appears the only thing [Navistar's] management team is capable of conveying to shareholders is excuses why its earnings weren't up to par." That's certainly in line with its latest earnings. Navistar's efforts to evade an EPA pollution regulation crashed into a wall this year, thanks in part to engine maker Cummins (NYSE: CMI) challenging the validity of Navistar's response. Cummins supplies engines to both Navistar and PACCAR, but Navistar can't be feeling too happy about the way its "partner" approached the EPA rules.

Cummins and Navistar also participate in an intricate natural gas infrastructure development effort with nat-gas-engine maker Westport Innovations (Nasdaq: WPRT) and fueling station operator Clean Energy Fuels (Nasdaq: CLNE) . Westport and Cummins produce a popular nat-gas engine together, which Navistar and Clean Energy have partnered to install in heavy-duty commercial vehicles.

This offers Navistar the potential for impressive growth, but there's a bit of a chicken-or-the-egg situation involved in nat-gas transportation. How many fueling stations will need to be built across the country before transportation companies view the fuel as a superior option? Just as importantly, how many nat-gas vehicles will need to be on the road to justify (and make profitable) this nat-gas fueling infrastructure?

Navistar's caught between a mature industry enduring an extended weak period and a growing alternative that hasn't yet gained critical mass. That's not a fun spot to be in for shareholders or management. Navistar's also under pressure to improve its engines to meet EPA standards, and its delays on that front attracted short-sellers like sharks to a whale carcass this summer.

Putting the pieces together
Today, Navistar has few of the qualities that make up a great stock, but no stock is truly perfect. These numbers are likely to change over time, so it's important to keep track of Navistar's progress. Navistar's hardly the only company that hopes to make it big on natural gas, but some are far better positioned than others. There's one under-the-radar energy company that's poised to explode when (not if) the price of natural gas rebounds. Find out more about this exciting opportunity in the Fool's newest free report -- click here for the information you need to make a great buy today.

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