Icahn begin building a position in Navistar, while concurrently building a position in Oshkosh Corporation (NYSE:OSK), with the idea to put pressure on the two companies – Navistar and Oshkosh – to merge their defense units. Icahn is now making an exit from Oshkosh after failing to get enough investor support to rearrange the company’s board of directors. Per a set of 13D filings this week, we can see that Icahn has already reduced his ownership of Oshkosh from 9.5% to 4.3%. Interestingly, Ray Dalio of Bridgewater Associates undertook a new position in Oshkosh last quarter (check out Ray Dalio’s full portfolio).
While Oshkosh has see recurring weakness in its defense segment, Navistar has more sustained product diversification, leading us to believe that Navistar is a better standalone investment. It appears that Oshkosh may still need a spinoff to help refocus its operations. Icahn appears to be making progress in Navistar, with two new members recently announced to the board of directors, and a third member to be agreed upon by Icahn and MHR.
Navistar’s trucking segment is around 70% of revenues, which manufactures medium-sized and heavy trucks in the U.S. and Canada. Navistar’s other segments include its engine (13.5%) and parts (14.5%) divisions, which make up modest portions of the company’s total top line. Boding well for Navistar is its dedicated customer – the U.S. government. This provides some stability for sales as it continues to get around 25% from government contracts that extend over several years into the future. MHR and Carl Icahn also have billionaire Ken Griffin as a fellow Navistar investor (see Ken Griffin’s latest picks).
Cummins Inc. (NYSE:CMI) has various exposures to many of the same markets that Navistar operates in. The engine maker expects revenues to be relatively flat this year after a 36% increase in 2011. North American truck engine sales are slowing, but emerging markets are expected to drive growth, particularly in India and China. This will boost the company’s long-term prospects, given that over 50% of revenues are derived from outside of North America. Other interim growth should be helped by pent-up demand in vehicle engines, due to aging truck and power-generating fleets. Cummins had billionaire George Soros taking a new position in the company last quarter (here’s what George Soros is buying).
Paccar Inc (NASDAQ:PCAR) is another top Navistar competitor and is expected to see revenues up by 9% in 2013. The slowing North American heavy-duty truck market has put pressure on Paccar. The equipment maker has been delaying capital expenditures, though its shares have still managed to remain up 20% year to date. The stock pays a dividend yield of 1.8%. Billionaire Steve Cohen – founder of SAC Capital – is one of Paccar’s big name investors (check out Steven Cohen’s top moves).
Deere & Company (NYSE:DE) is an equipment-making giant that has managed to scale operations and its business to transform itself into a farm and construction mega-manufacturer. With its size and ability to generate cash – $4.6 billion on hand as of 3Q – Deere rewards shareholders with a 2.2% dividend yield. Deere is also a global economic bellwether that might be poised for growth on the toes of a rebounding economy. Higher harvest prices and rising populations worldwide should help boost demand for farm equipment, while developing emerging markets and an aging out of equipment will drive construction equipment revenues. Notably, Deere saw Warren Buffett take an almost 4 million-share position last quarter (see Buffett’s top stock picks).
On a valuation basis, Cummins, Paccar and Oshkosh all trade in a tight P/E range, but Navistar has an incalculable P/E. Looking beyond earnings, we see that Navistar is a solid value on a P/S and P/CF basis. The stock trades the cheapest amongst its peers using both metrics, with a P/CF of 4.5x and P/S of 0.1x. We see limited growth for Oshkosh with its defense segment expected to continue to be weak, but remain confident in Navistar. We believe that investors are underappreciating Navistar’s cash flow generating capabilities. Navistar has managed to grow free cash flow by 25% over the last five years, with Paccar and Oshkosh having negative return rates and Cummins lagging behind by nearly 10 percentage points.
