Novice Investing - The Star Of The Day

By: Novice Investing Staff
Industry Background
Navistar International Corp. (NAV) is primarily in the business of manufacturing and marketing commercial truck and buses. Competitors include Paccar Inc. (PCAR) and Daimler Chrysler AG (DCX)

Trucking business is a brutal and cyclical business. During good times, orders are flowing in while during lean times, price are low while orders trickled to a stop. Just like auto, trucking industry is notoriously cyclical to economic cycles. Currently, the fed is raising interest rate in the bid to slow down the economy. This does not bode well for the trucking industry. However, if Navistar can survive the economic slowdown,

Quarterly Current ratio that is greater than one and is stable or rising.

NAV	July 05	Apr 05	Jan 05	Oct 04
Current Ratio	1.05	0.83	0.72	0.97

Quarterly current ratio is stable, but dangerously low for Navistar International. The minimum current ratio for most companies are above 1.0. Below 1.0 is considered bankruptcy candidate as the company is deemed to be unable to pay its short-term obligation. Navistar is profitable for the last two fiscal years. Therefore, bankruptcy is not imminent yet. Furthermore, Navistar has a $ 2 Billion of long term investment which can be as good as cash. However, we need to keep an eye on Navistar's liquidity since its current ratio is dangerously low.

Fair value of the stock is 3% above current free risk interest rate (10 yr bond)
As of 11/30 2005, 10 yr bond yields 4.66%. The stock needs to yield 7.6% to give it a fair value. Let's use a fair value yield of 8 % due to the unstable nature of Navistar's earning. Assuming a 0% growth, fair P/E value for Navistar is therefore12.5. EPS for Navistar for fiscal year '06 is predicted to be $ 2.87. For more details about EPS calculation, please go here. The fair value for Navistar's business (real price) is therefore $ 35.87. Meanwhile, Cash equivalents & long term investment per share for Navistar is $ 49.4 per share and Long Term Debt per share = $ 38.54/share. Using the formula below, we can find the fair value of Navistar stock: Real price = stock price - (cash+ short-term investment)+ long-term debt. Stock price = $ 35.87+ $ 49.40 - $ 38.54 = $ 46.73/share.

50% potential stock price appreciation within a year.
Current price for Navistar International Corp is $ 28.09/share. With fair value of $ 46.73 per share, Navistar does give us 50% potential price appreciation. This assumes a 0 % earning growth for the foreseeable future and a free risk interest rate of 4.66%. At this circumstances, we peg the fair P/E value for Navistar's business is 12.5.

Conclusion
We are adding Navistar to our portfolio at $ 28.09 per share. With $ 2000, we can buy 71 shares worth of Navistar (NAV). We will give updates from time to time regarding its business conditions. Click here to look at the complete list of our portfolio pick.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Navistar International Corp. (NAV) or any other securities.