Editor’s Note: American Axle (NYSE:AXL) does not have a debt free balance sheet, this version has been corrected to reflect this fact. Motley Fool apologizes for the error.
Shares of companies showing remarkable turnaround or even hints of it are often the subject of brisk advances. Navistar International Corp (NYSE:NAV), Century Aluminum Co (NASDAQ:CENX), and American Axle & Manufact. Holdings, Inc. (NYSE:AXL) are players expected to show just that, and the market seems to be buying this story. Shares of all three companies are up over 15% in just the past thirty days. So, should you believe that the rally will continue?
After ramming the truck into a wall, Navistar is recovering
is a manufacturer of international brand commercial trucks: IC Bus brand buses and MaxxForce brand diesel engines. Investors may not think of the mundane trucking business as one where companies have much scope of innovation. However, Navistar International Corp (NYSE:NAV) went on to prove otherwise with a new engine technology called exhaust gas recirculation (EGR) to meet new and stricter emissions norms.
It was in 2007 that these requirements were to be phased in, and the world was betting on a competing ‘selective catalytic reduction’ (SCR) technology, which Navistar International Corp (NYSE:NAV) derided. What followed was stuck development and sales of non-compliant engines and trucks until 2010, when the requirements came in full force. This resulted in heavy penalties for Navistar International Corp (NYSE:NAV), crimping the company’s finances and allegedly bringing it closer to bankruptcy. It took quite awhile for the company to realize its mistake, but lately it has abandoned plans and is now sourcing SCR engines from a European producer.
Navistar International Corp (NYSE:NAV) shares were battered, but are recovering now, as it becomes increasingly obvious that the company’s finances are set to change for good. Shares have gained 31% over the last quarter, but are still nowhere close to the previous highs. Analysts are also bullish about the company, which is reflected in generally positive recommendations for the stock. The company trades at a forward PE multiple of 1.
The improvement in finances is already visible in the numbers presented for the quarter that ended in March. Revenue suffered during the quarter, for obvious reasons, but the company demonstrated a firmer grip on costs, indicated in a reduced net loss of $123 million. This is lower that the previous year, as well as the previous quarter.
The case for Century
California-based aluminum producer, Century Aluminum Co (NASDAQ:CENX), is another player in this league. The stock is down nearly 6% on an annual basis, as the markets attached heavy discounts on material stocks. Given the carnage in metal prices last year, this was justified, too. However, the situation is improving as companies learn ways to deal with lower selling prices. In the first quarter of this year, Century Aluminum reported revenue of $321 million, marginally lower than the $326 million in the same period a year ago, but it was the bottom line that stole the show. Profits stood at $8.2 million during the latest three months, a complete contrast to a loss of $4.4 million in 1Q12.
The market seems to like the story, sending the stock up more than 20% in the last month. The stock still trades at a forward price earnings multiple of 15, and at a 22% discount to its book value of $11 per share.
Another stock related to the automotive industry that’s showing fresh signs that the worst is behind is American Axle & Manufact. Holdings, Inc. (NYSE:AXL). The company is a producer of drive line and drive train systems, and related components and chassis modules for the automotive industry. It counts several global automakers as its clients. The stock has gained more than 22% over the last quarter, as investors came to realize the company is undervalued.
In the most recent quarter, the company reported a sharp drop in profits, but revenue increased, beating the Street expectations. As markets were already expecting lower profits, this did not come as a surprise, but revenue of $755.6 million topped mean analyst expectations of $750 million. The market has taken the results positively, as continued traction in revenue growth is likely to result in better profits in quarters to come.
Foolish bottom line
Investors have rightfully bought up shares of these three companies, as they have shown signs of turning around. Despite the recent rally in share prices, all three companies trade at relatively cheap valuations, which means there could be more upside ahead.
The article Should You Bet On These Turnaround Stories? originally appeared on Fool.com and is written by Jacob Wolinsky.
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