Navistar International Corp (NAV) In The Danger Zone

buyers and sellersDavid Trainer: Truck manufacturer Navistar International Corp (NYSE:NAV) is in the Danger Zone this week. NAV has gone though a rough couple of years after making a big bet on exhaust gas recirculation (EGR) engines that backfired after the engines failed to pass EPA emissions standards. The scramble to replace these failed engines (along with secular industry headwinds) caused NAV’s revenue to decline by 23% between 2011 and 2013. Meanwhile, fines and warranty costs have helped to swing NAV from an operating profit (NOPAT) of $590 million in 2011 to a loss of $410 million in 2013.


One would expect such a poorly performing company to have a similarly embattled stock, but NAV actually went up 73% last year as investors (including Carl Icahn) gained optimism over a potential turnaround. NAV bulls believe the company will regain much of its lost market share and return to profitability as its warranty liabilities from EGR engines goes away. Despite the market’s optimism, NAV is much further from success than its stock performance suggests.


Where’s The Cost Leverage?


The bull case for NAV relies on the company being able to restore its revenues and margins from before the EGR fiasco. Unfortunately, NAV is in a much less advantageous position now than it was only a few years ago. The most troubling issue facing NAV is its significant loss of market share.



Figure 1: Market Share in U.S. and Canada




Screen shot 2014-01-13 at 9.12.16 AM


Sources:   New Constructs, LLC and company filings



In 2011, NAV had a similar market share for Class 8 trucks to its competitor PACCAR (NASDAQ:PCAR). Now, PCAR has nearly double the market share of NAV in this important category. Higher market share means more pricing power and greater scale, both of which help to drive higher margins. NAV is not going to be able to achieve the same margins with an 18% market share as it could with nearly 30% of the market.


NAV also faces the disadvantage of relying on a competitor for the engines it puts in its trucks. After its issues with EGR engines, Navistar went back to using Cummins (NYSE:CMI) engines in its signature ProStar+. Relying on a third party for such a large and important part of its truck means NAV has structurally higher costs than key competitors like Daimler and PCAR.


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