Navistar changes course on engines, stock slides

Stock Market Predictions

(Global Markets) - Navistar International Corp (NAV.N), struggling to win U.S. regulatory approval for a new generation of diesel engine, changed course on Friday, saying it was developing a new model expected to be ready early next year.

The move failed to impress investors, who sent shares of the U.S. truck and engine maker down 16 percent, making it the biggest loser on the New York Stock Exchange. Analysts questioned the costs for the transition to the new engine.

Navistar, which makes the International brand heavy trucks and school buses, said the new engine would use liquid urea to help cut emissions of nitrogen oxide, a pollutant linked to asthma. Liquid urea is used by its rivals as a catalyst in diesel engines to reduce emissions of nitrogen oxides.

The move amounts to taking the same road as rivals, including engine maker Cummins Inc (CMI.N) and truck maker Paccar Corp (PCAR.O).

"It fell short of my expectations," said Morningstar analyst Basili Alukos of the move. "I was expecting or hoping for them to abandon their engine business completely and start buying from a third-party supplier."

A key concern for investors is whether the uncertainty around Navistar's engine strategy will make trucking companies less willing to buy its vehicles.

"Seven months ago this would have been a welcome announcement," said Rob Wertheimer, an analyst with Vertical Research Partners. "As it is we see it as a positive, simply due to clarity, but a high risk. Navistar aims to have engines on the road in early 2013. There remains a risk that Navistar is shut out of the business temporarily before then."

In addition to its trouble winning regulatory approval for the new engines, Navistar last month surprised Wall Street with a quarterly loss after taking a $104 million charge for warranty claims on engines sold in 2010 and 2011.

Navistar said its new technology, called In-Cylinder Technology Plus, will also help meet greenhouse gas emission rules in advance of 2014 and 2017 requirements.

Navistar had previously had difficulty winning approval from the Environmental Protection Agency for an alternate technology that did not use liquid urea, which the company had asserted would be a lower-cost option for truckers. It said its forthcoming engine will include aspects of each technology.

"Today's decision (is) a step in the right direction, but more answers (are) needed before becoming aggressive on the stock," R.W. Baird & Co analyst David Leiker wrote in a note to clients. Key questions include the costs of launching the new engine and how profitable the engine will be, he said.

NO FINANCIAL FORECAST

Navistar Chief Financial Officer Andrew Cederoth told investors in a brief conference call the company would not update its earnings and revenue forecasts until after it receives approval for the new engine from the EPA and California regulators.

Executives took no questions during the call.

Analysts, on average, expect a full-year loss of $2.18 per share, including one-time items, or a profit of 22 cents, excluding items, on $14.22 billion in revenue, according to Thomson Global Markets I/B/E/S.

The company said it has already shared its new engine approach with the EPA, which it described as "supportive."

"We have a high degree of confidence in the certainty of certification," said Troy Clarke, who was named president of its truck and engine business last month.

The EPA said in a statement it would "review any new certification application or information once it is received."

Navistar shares were down $4.71 to $24.08. They have lost one-half of their value over the past year and have been volatile over the past month, following the quarterly loss and the emergence of a new, big activist shareholder.

Activist fund company MHR Fund Management LLC, founded and run by Mark Rachesky, has taken a 13.6 percent stake in Navistar, becoming the largest shareholder, ahead of billionaire investor Carl Icahn who owns 11.9 percent.

Faced with the two activist stakeholders, Navistar last month adopted a poison pill plan to fend off hostile suitors.

Icahn last year sought to merge Navistar with rival Oshkosh Truck Co (OSK.N), of which he owns 9.5 percent. Navistar Chief Executive Daniel Ustian had been open to the idea but Oshkosh management and shareholders rejected it.

(Additional reporting by Bijoy Koyitty in Bangalore; Editing by John Wallace, Jeffrey Benkoe and Phil Berlowitz)