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Trucking to Disaster by Carl Icahn

April 07, 2014 | About:

The greatest upside to an all-American brand is its longevity. Public interest will do whatever is possible to keep the brand around, and investors are aware of that. Hence, there should be no surprise in the reappearance of Indian motorcycles by Polaris (PII), or Harley Davidson (HOG)’s revival. And those are only two successful examples in one single industry.

However, examples abound across industry frontiers, as brand recognition is a strong enticement for investors. The objective is always the same: to light the old spirit flame that engulfed the underperforming company. Or, in more extreme cases, to raise the phoenix from the ashes. Navistar International (NAV) is another case in which a troubled but highly recognizable brand was able to continue in business amid great difficulties. After all, anyone born after mid-1970 has ridden to school in one of their buses. But, what is the reason for Carl Icahn (Trades, Portfolio) to become the largest shareholder in 2013?

Of Performance and Continued Efforts

The first quarter of 2014 did not revert the declining performance tendency experienced by Navistar International for some time now. Net losses have amounted to a total of $248 million, $125 million more than the same period on the previous year, while revenue dropped by $0.4 billion to $2.2 billion. Rooted in lower-volume sales, related to the company's medium-duty emissions strategy transition and lower military sales, the drop in overall performance was partially offset by a reduction of $67 million in structural costs.

Besides a poor performance, management has not abandoned hope, and introduced new technologies to the vehicles. OnCommand Connection, Diamond Logic and fully automatic and automated manual transmissions (AMTs) make vehicles more fuel efficient, safer, capable and more productive. At the same time, the company attended the Mid-America Trucking Show to display the full Class 8 vehicle portfolio equipped with MaxxForce and Cummins engines, and the International ProStar with Cummins ISX15 engine featured along with OnCommand™ Connection diagnostics demonstrations.

Most importantly, Navistar International has announced the introduction of MaxxForce 9 and MaxxForce 10 engines with SCR at the International DuraStar and International WorkStar vehicles beginning this summer. News outlets have also highlighted the continued investment in severe service and medium-duty product lines through vehicle enhancement expansions and powertrain choices. Last, improvements in the communication and customization of the Diamond Logic electrical system were made to improve the relationship between interior and exterior equipment.

Choked by Regulation and Competition

All the announcements made by Navistar International did not impact on the market. On April 3, the stock reported a loss of 0.77%, closing at $34.60, declining further after that to a low of $33.80 on the following day, to close at $33.91. Nonetheless, Zacks has reiterated a “Neutral” rating for the stock, while BMO Capital Markets and Robert W. Baird boosted target price throughout the month of March. UBS AG alone has downgraded the stock during the same period, setting a target price above mid-$30 like other financial institutions.

On the upside, Navistar International has shown a remarkable ability for cost savings without reducing operations. Additional savings are expected to amount to $175 million, while at the same time Class 8 sales in the U.S. and Canada should increase above 10,000 units in 2014 with respect to the prior year. The engine driving such growth is to be found in an improving economy and truck industry and higher market share, coupled with continued cost reduction initiatives. Most importantly, the addition of the Cummins ISX and the ISB to the engine portfolio will continue to increase market share.

On the downside, Navistar International is seeing operational cost increments related to ongoing changes in the on-highway emissions standards concerning fuel efficiency, noise, and safety. The Environmental Protection Agency and the government of Canada passed new regulation on greenhouse gas emission and fuel efficiency, required to be in place on 2017 models. Additionally, competition is cutthroat in the industry pushing for price discounts and margin erosion.

Last, Navistar International’s stock is greatly overpriced with respect to the industry average due to the risk associated with it. Moreover, further decline in price is expected to come its way while operating margin continues on the negative and total debt rises. It is recommendable not to follow Carl Icahn (Trades, Portfolio)’s gamble, and wait for a possible takeover that will overturn the company’s performance.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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