Why You Shouldn’t Expect a Lot From This Stock

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Navistar International’s (NYSE: NAV) Interim CEO Lewis Campbell is clearly excited. Just weeks after taking over the seat, Campbell already has a to-do list in hand, replete with tough moves and ambitious targets.

While management might sound optimistic, the question that’s bothering me is: will all these moves end up in the company’s favour? Difficult to say, because by the time Navistar gets up on its feet again, rivals would have taken big strides too. It’s a long way for the embattled company, one that’s riddled with potholes.

Tucking it away

Navistar is all set to slash costs from here, there and everywhere, and they aren’t limited to lay-offs. It will wrap up businesses and even back out from some markets.

While the company is yet to name which part of operations it will wind up, it has answered the anxieties of all those who had their fingers pointed at its defense business -- the company is in no mood to part with it. This might come as a surprise at a time when defense contractors are in a tight situation, staring at $500 billion cut in U.S. defense spending to kick off in January next year. The world’s biggest contractor Lockheed Martin (NYSE: LMT) had earlier forecasted that it might have to lay off 10,000 workers in anticipation of the cut. Although the company isn’t taking any action before the elections, it remains apprehensive about the looming change.

What’s encouraging Navistar to stick to this business then? Probably because its defense business accounts for a good chunk of its total sales -- in 2011, U.S. defense sales of $2 billion accounted for nearly 21% of the company’s truck segment (which is also its largest) sales, or 14% of total sales. But what’s worth noting is that the $2 billion revenue was 11% and 29% down from 2010 and 2009, respectively. In a nutshell, things haven’t exactly been good for Navistar’s military vehicles business, particularly because it depends entirely on U.S. defense spending. Knowing what the situation is right now, it sounds too risky.

Losing ground

This is probably why companies like Lockheed are increasingly eyeing the markets outside the U.S., particularly the Asia-Pacific region. 25% of sales in each of its two largest divisions (that together account for more than 60% of total sales) came from international customers in 2011.  Sadly, this is exactly where Navistar might lose ground, because one of its plans includes reducing focus on global markets while intensifying efforts to strengthen North American operations. If this doesn’t sound too great for its military business, it could mean lost opportunities for its core truck business as well.

Navistar has significant operations in some of the fastest-growing markets of the world, including Mexico, Argentina, Brazil, India, and China; if it contracts in any of these markets, peers will just have an added advantage. Though Cummins (NYSE: CMI) was compelled to slash its full-year outlook some months back as three of its key markets -- China, Brazil and India – remained sluggish, it continues to remain bullish on the prospects of these markets in the long run. So does Swedish competitor Volvo, which is beefing up business in the emerging markets, right from new launches to setting up production units.

But from Navistar’s point of view, giving priority to the North American markets might make sense, considering how the company is rapidly losing market share in what is also its major market.

Desperate measures

Uncertainty over EPA certifications, rising warranty claims, piling losses – Navistar’s customer base has dwindled fast in the past year or two. In the critical Class 8 heavy-duty truck market,  while peer PACCAR’s (NASDAQ: PCAR) share (in the U.S. and Canada) jumped from 28% in 2011 to 30% within the first six months of 2012, Navistar’s share slipped from 21% last year to around 18% in its last-reported quarter.

Navistar’s problems peaked when it had to shelve its ambitious unique-technology engine plans some months back – a plan that had cost the company billions of dollars. Competitors are naturally cashing in on Navistar’s pains, and will continue to do so as long as the company stands on shaky grounds.

Navistar isn’t wasting time though, and is working hard to get its 11-liter and 13-liter engines out in the market by March next year, a month earlier than scheduled. And before 2013 end, it hopes to see its trucks powered by Cummins’ 15-liter engines to be out on the roads. Yes, after the mess it landed itself in, Navistar had no option but to hold the hand of its closest rival for support.

Tough fight

But why would customers go for a Navistar product when there are solid options like Cummins around? Cummins impeccably met 2010 emission standards, and its warranty claims hit a 15-year low at around the same time Navistar’s hit their peak. Not just that, Cummins’ ISX15 engine has already received its first EPA certification confirming compliance with new fuel-efficiency rules that won’t be implemented before 2014.

In simpler terms, Cummins’ engines are getting certified full 12 months ahead of timeline while Navistar is still struggling with old emission requirements. Don't forget other companies like Volvo, which is readying its new Euro 6 compliant 11-liter engines for launch later next year. Likewise, PACCAR’s recently unveiled new Euro 6 MX 13-liter engine under its hugely popular DAF brand will go into full production next year.

Will it gas its way up?

The going’s tough, but there’s one growth area that could well turn the company's fortunes around – natural-gas engines. Navistar recently jumped on the natural-gas bandwagon when it partnered with Clean Energy Fuels to boost the sale of its natural-gas-powered truck, following which it announced that it would be using the hugely popular engines made by Cummins in collaboration with the expert-in-its-field Westport Innovations (NASDAQ: WPRT) for its trucks.

Navistar is again late to the party, being the last to opt for Cummins-Westport ISL G engines, but as they say, better late than never! Though natural gas conversion is still pretty much in its initial stages, Westport’s numbers tell me the trend is catching up fast – it earned double the revenue and cut net losses by nearly a third in its last quarter from the year-ago period as it found more takers for its innovative technology. This could be one great growth opportunity for Navistar, if it is serious about it, that is.

Foolish takeaway

Navistar’s shares have been in a free fall for months, and I know better than to bet on management’s words, particularly when safer options are available. It’s too early to say how and when the company will truly turn around, but it might be interesting to track it nevertheless. Just click here to add Navistar to your stock watchlist to stay updated. 

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.

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