Things You Should Know Before Buying into This Stock’s Rally
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New management with big reassurances, hopes and action plans to steer a company out of real trouble – is it enough to raise the green thumbs up for a stock? The market seems to think so; Navistar International’s (NYSE: NAV) shares have gained nearly 10% in the past five days. If you ask me, I am holding off.
The ailing truck maker has not one, but several herculean tasks lined up, and I can’t just put my faith in a new CEO who has been there but a few days, although he looks promising.
Road downhill
None of the numbers from Navistar’s third quarter are truly worth mentioning. Revenue slipped 6% from the year-ago quarter to $3.3 billion, and net profit took a huge hit to land at $84 million from $1.4 billion a year ago. No guidance was provided. But numbers aren’t as important right now as is the storm brewing inside the company. CEO Daniel Ustian left some days back after his dream to get exhaust-gas recirculation (EGR) technology engines certified by the U.S. Environmental Protection Agency (EPA) failed, leaving the company in the lurch. Ustian’s resignation was inevitable, and a good move.
While peers embraced the selective catalytic reduction (SCR) technology to meet stringent 2010 EPA standards, Ustian adamantly stuck with EGR. Today, peers have raced ahead while Navistar stands disqualified. While Ustian’s won’t-budge-from-my-stand attitude can be largely blamed for where the company is today, I feel another factor worked as much in pushing Navistar to the brink – EPA’s rule that allowed the company to continue with its non-compliant engines by paying fines. Using pollution credits in lieu of fines, Navistar easily rode the non-compliance storm while competitors sulked. Cummins (NYSE: CMI), Volvo, Daimler – all challenged EPA’s rule. Meanwhile, Navistar tried hard to get its engine certified by EPA. The cat-and-mouse game continued for two years, finally ending with Navistar bowing out. The company now faces the uphill task of getting a new alternative technology on track.
When the news came out, I thought the best and immediate way out of the muddle would be Navistar opting for Cummins’ engines for its trucks while it gets its own engines on track. Falling back on a rival sure would be like rubbing salt on wounds, but not if it works as a bail out. Navistar’s management realizes this, and will thus start delivering trucks powered with Cummins’ 15-liter engines by the end of the year. Cummins’ components will also be used to help Navistar bring its own engines out by April 2013. Another good move, but with a pinch of salt.
Daunting task
All this indicates Navistar’s increasing dependence on Cummins to steer its business forward. Also, rivals have already been using SCR technology for long and thus enjoy a head start. Most importantly, while Navistar gets its act together, competitors are growing bigger. Truck maker PACCAR’s (NASDAQ: PCAR) share in the U.S. and Canada Class 8 (a critical heavy-duty trucking segment) market rose from 28% in 2011 to 30% during the first half of this year. Navistar’s market share has only dwindled in the past two years, not just in Class 8 but in other product segments as well in these two markets. Here’s a quick look:
| Product segment | 2010 | 2011 | 2012 | ||
| Q3 | Full year | Q3 | Full year | Q3 | |
| School buses | 53% | 59% | 47% | 49% | 47% |
| Class 6 and 7 medium trucks | 36% | 38% | 46% | 41% | 36% |
| Class 8 heavy trucks | 30% | 24% | 17% | 17% | 15% |
| Class 8 severe service trucks (military commercial vehicles) | 38% | 40% | 36% | 35% | 30% |
| Combined Class 8 | 32% | 28% | 21% | 21% | 18% |
| Total U.S. and Canada market share | 35% | 34% | 29% | 28% | 24% |
Source: Company financials
Don’t expect 2012 full-year share percentage to be any better.
On a bumpy road
Navistar has to work it all out in a situation where top line isn’t growing, coffers are half empty and challenges aplenty. The company has managed to secure a five year, $1 billion loan, but a part of it will be used to pay existing debt, and the company will bear additional interest expenses. As it is, Navistar is battling mounting warranty costs, and now has to shell out double the fines per non-compliant engine to the EPA. Clearly, management has to bring its most prudent cash-management strategies out. Interim CEO Lewis Campbell aims to reduce costs up to $175 million in financial year 2013 through layoffs and spending control.
Reviewing non-core businesses is also on the agenda. Now if that leads to doing away with businesses such as school buses and defense, it will be birth to a new Navistar altogether. These businesses are facing their own share of lows. Several school buses had to be recalled earlier this year to fix possible leaks which could lead to faulty brakes, and its military business has just lost a potential $14 billion contract to develop the U.S. military’s advanced combat vehicle Humvee.
Saving grace
Navistar has to be nimble if it does not want to jeopardise key partnerships like the one with Caterpillar (NYSE: CAT), which gave it a lifeline recently by announcing it will continue to use Navistar’s engines (the ones with Cummins technology). The two companies share a long-standing relationship and even announced plans to strengthen it further earlier this year.
In fact, Navistar’s turnaround could depend a good deal on these tie-ins and its ability to tap hot opportunities like natural-gas conversion. It took a step ahead in February by opting for natural gas engines Cummins makes in collaboration with Westport Innovations. These engines are cleaner and advanced, and are also emerging as favorites with PACCAR.
I’m not game
That Campbell has a tough task at hand would be an understatement, but his experience should come handy. During his 10-year leadership at planes and helicopter maker Textron (NYSE: TXT), Campbell nearly transformed the company through moves like consolidating operations, getting rid of non-core assets, and expanding portfolio. Prior to that, he was at General Motors for 24 years. Navistar desperately needs some speck of fairy dust -- they also havw to hunt for a long-term CEO.
For a company which is has also come under the SEC scanner for accounting and disclosures, risks are way too may for my liking. I wouldn’t get swayed by billionaire activists bulking up on Navistar’s shares, not until I see new management’s plans turn into concrete actions.
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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Textron. Motley Fool newsletter services recommend Cummins and PACCAR Inc. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
