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Analysts offer mixed outlook for Navistar

March 9, 2012

A far higher than expected quarterly loss coupled with ongoing uncertainty over the emissions certification prospects for its diesel engines is causing some investment analysts to doubt the wisdom of truckmaker Navistar’s long-term market strategy. Others, though, believe those losses and regulatory hurdles are but short-term glitches – better preparing the OEM to reap success in the future.

Well-known CNBC stock analyst Jim Cramer is in the “thumbs down” category for Navistar in a blog post this week.

“A huge miss … a staggering $153 million [quarterly] loss, or $2.19 per share [that] was from warranties and recalls,” he said. “Without one-time charges, the company reported a still-horrendous loss of $2.08 per share, when Wall Street was looking for a $0.27 loss.”

He noted Navistar had to recall 19,000 buses and trucks due to Bendix brake valve issues, with $112 million in losses stemming from warranty issues for engines manufactured between 2006 and 2008.

Cramer added he was also “astounded” that Navistar reduced its profit guidance from $5.75 per share to a range of $4.75 to $5.25 within the space of a month. “Talk about losing control of the situation,” he said, pointing out that engine-making rival Cummins recorded 19% higher sales for the fourth quarter last year with earnings coming in at $2.56 when analysts were looking for $2.24.

“Cummins is taking share and riding high on the huge increase in trucks being ordered worldwide, particularly in China,” Cramer noted.

Walter Liptak, an analyst with Chicago-based investment firm Barrington Research, said in an investor brief this week that those issues – including Navistar’s now revised expectation that it will indeed pay non-compliance penalties or “NCPs” to the Environmental Protection Agency (EPA)to the tune of $25 million – don’t significantly impede the company’s prospects for future growth and profits.

“Our investment thesis has changed following [Navistar’s] first quarter earnings release,” Liptak said. “Navistar’slow [stock] valuation and prospects for eventually getting its 11L, 13L and 15L engine EPA 2010 certification should support the stock at the current levels.”

However, he stressed that “2012 is clearly a transition year due to problems in getting governmental approval for new engine products,” and that this is affecting 2010 profitability and creating uncertainty about Navistar’s chances for long-term success.

Yet he believes that the three truck warranty issues cited by Navistar for its $112 million charge against earnings in the first quarter – described as a “medium-duty legacy” issue regarding engine calibration, higher Brazilian foundry start-up costs and its 2010 engine launch issue – Navistar should emerge in 2013 with those problems resolved.

“Navistar missed our EPS [earnings per share] target due to larger losses in the truck and engine segment related to the 10 days of delayed shipments resulting from the Bendix brake issue, but that brake recall is over and should be viewed as a one-time item,” Liptak stressed.

“Importantly, Navistar expects EPA 2010 13L certification sometime in spring 2012, and 13L compliance engine production beginning in June 2012,” he said. “We believe that EPA certification for the 11L and 15L engines should require less time due to the 13L learning curve.”

For those reasons, Barrington is maintaining its “outperform” rating for Navistar. “The year 2012 will likely continue to be a messy period due to uncertainty and delay in transition to EPA compliance,” Liptak explained. “However, EPA compliance should soon get resolved.”

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