Why Navistar Looks Good in Spite of Tepid Numbers

Navistar's (NYS: NAV) third-quarter net profit figure came in at an eye-popping $1.4 billion, compared with just $56 million a year ago. Being the savvy Fool that you are, you must have guessed there's something big behind the impossible-sounding jump.

Of course there is. Let's dig a little deeper before making a call on the company.

Decoding the numbers
Navistar's revenues grew 10% from the year-ago quarter to $3.5 billion, driven by strong inter-company sales and higher demand from markets like South America.

What came as a surprise was the loss of $75 million reported in Navistar's core segment -- trucking. The good part is that the fall was not due to lower revenues. Although revenues rose 33%, Navistar has been undertaking some operational restructuring that resulted in additional charges and led to the drop in profits.

Another low point has been a fall in military revenues, which is not very surprising given the recent defense budget cuts the U.S. has been resorting to. Oshkosh (NYS: OSK) , the U.S. military's largest armored-vehicle supplier, also saw a steep decline of 35% in its third-quarter defense-segment sales.

So what accounted for the whopping net income? Navistar's bottom-line jump has entirely been driven by a huge tax benefit of $1.46 billion. After all that, adjusting for one-time items, its net profits have actually come in at $61 million, missing Street estimates.

Cost-efficiency focus
Navistar has been focusing on a series of steps to mitigate costs and ramp up efficiencies. 

As a part of restructuring its North American operations, Navistar has wisely decided to close down an Ontario-based facility that has been lying idle for more than two years, resulting in savings of more than $200 million.

In a bid to improve efficiency and productivity, Navistar will also close down a chassis plant and consolidate its operations with other facilities. Apart from these moves, the Illinois-based company is also planning layoffs in some plants.

Reaching out
While cutting back costs, Navistar is eyeing higher revenues from the global markets by expanding operations. It has plans to increase its dealership base in India while ramping up sales. The company is also looking at gaining a greater foothold in China and Brazil and is entering South America with new products.

Most industry players are looking at these markets to rev up revenues. Paccar (NAS: PCAR) , for instance, will build a truck plant in Brazil, while Caterpillar (NYS: CAT) has been foraying deeper into regions like China. Cummins (NYS: CMI) , too, remains upbeat about these markets.  

Flush with a cash balance of $1 billion, Navistar looks well placed to take on expansion plans while returning value to shareholders with its recently announced repurchase plan worth $175 million.

The Foolish bottom line
Navistar has pushed back the lower end of its full-year guidance, but a good forecast for the industry, along with suitable growth plans in place, make it a stock worth watching for the longer term. The company has also received additional vehicle orders from the U.S. army to support forces in Afghanistan last month, putting to rest the end-of-the-world scenarios for defense companies.

What do you think about Navistar? Share your views with us below, and keep a tab on Navistar by adding it to your Watchlist

At the time this article was published Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Oshkosh.Motley Fool newsletter serviceshave recommended buying shares of Paccar. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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