Moody’s Investors Service, the credit rating agency of Moody’s Corporation (MCO), raised its ratings outlook on Navistar International Corp. (NAV) from “Stable” to “Positive.” The ratings upgrade was based on a recovery in the medium and heavy truck markets.

The U.S. government is one of Navistar’s dedicated customers, which provides stability to the company’s sales. The company continues to derive about 25% of its revenues from the U.S. government. Most of its existing U.S. government contracts extend over several years.

In February this year, Navistar has been awarded a military truck order of $750 million to manufacture about a thousand Mine Resistant Ambush Protected or MRAP vehicles for the Marine Corps. Based on this contract, the truck maker has upgraded its financial outlook for fiscal 2010 ending October 31, 2010.

The truck maker expects to earn $198 million–$234 million or $2.75–$3.25 per share for the fiscal year. This is higher than the guidance to earn between $127 million and $163 million or $1.75 per share and $2.25 per share, which was provided while presenting first quarter of fiscal 2010 results.

In the third quarter of its fiscal year, Navistar posted a profit of $137 million or $1.83 per share, in sharp contrast to a loss of $12 million or 16 cents per share in the year-ago quarter. The improvement in profit was attributable to impressive performance by the company’s core businesses.

The company expects a 9%–12% rise in demand in the North American truck industry to 190,000 units–195,000 units for the fiscal year. Last year, truck industry sales in North America declined to its 47-year low of 181,000 vehicles.

However, Navistar faced a major setback by losing its diesel engine supply agreement with its largest customer, Ford Motor Co. (F), in December of last year. Ford accounted for 42%, 44% and 58% of the company’s diesel engine unit volume in 2009, 2008 and 2007, respectively, primarily relating to the sale of its V-8 diesel engines.

Based on these factors, Navistar retains a Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) recommendation of Hold.

 
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