California Construction Trucking Association (CCTA)

Navistar (NAV) is experiencing an eventful August, with the stock displaying volatility in the first week of the month. The stock plummeted 14% after the company slashed its future outlook amidst a weak U.S. truck market forecast, disclosed its ongoing inquiry with the SEC, and announced its future partnership with Cummins (CMI) to obtain urea-based engines after the company’s CEO, Ustian, decided to give up his disastrous EGR engine strategy.

However, lately, the stock has regained most of the loss after it offered to buyout nearly 30% of its workforce. Also, the company has received an approval from the EPA to continue selling its heavy-duty diesel engines, as long as it pays the fines on those engines. However, a final ruling on the change in the amount of fines has not yet been given. Moreover, according to Ward’s automotive report on Class 8 engines market share data, NAV’s share of factory shipments (that do not include retail sales) rose by 260 bps to 13.9% in June.
Amidst all these events, NAV has continuously faced pressure from activist holdings as Mark Rachesky’s MHR recently increased its share in NAV to 14.99%, just shy of the 15% level that earlier triggered the poison pill defense from NAV’s management. Currently, Franklin Resources (BEN), Carl Icahn and MHR hold a total of about 45 percent stakes in the company.

Job Cuts

NAV disclosed its intentions to lay off its workforce in order to cut costs, which have led to weak operating results for the year. The company has offered a voluntary separation package for 6,300 employees of its total 19,000 workforce. These might not be the only job cuts planned by the company, as NAV’s spokeswoman, Karen Denning, was reported as saying, “That is the last lever. The number of people cut is contingent on the success in other areas.”

Market Share & Report on U.S. Future’s Transportation

NAV was reported to have the highest increase in a market share in the engine market in June. The improvement of 260 bps (from 11.3% to 13.9%) was far greater than the 60 bps (from 39.4% to 40%) improvement for CMI. Paccar Inc (PCAR), on the other hand, faced a declining market share (from 5.1% to 4.7%) as it is relatively new to the engine business. Currently, CMI holds the largest chunk of the market share.

The trend shows us that the market share has been fluctuating. Therefore, the rise of 260 bps is nothing but the temporary recovery of the market share that NAV lost in lieu of the EPA fines and compliance issues.

However, next year, NAV is expected to recover more of its lost market share after it offers CMI 15-L engines and Maxxforce, its own 13-L engine.
With regards to the truck market, the situation remains bleak. NAV has already decided to use CMI engines for its heavy duty trucks next year. CMI engines to be installed in HD trucks cost more than the current non-compliant NAV engines. Therefore, the company will have to raise prices, which will erode its market share.

EPA Approval

On Aug. 8, the U.S. regulators allowed NAV to continue selling its non-complaint engines as long as it pays the fines accrued on them. However, the final ruling on the changes in fines to be paid has not yet been declared. The company already pays a fine of $1,919 per engine sold. The amount can be raised up to $10,000 in fines per engine, which is a big risk to the stock’s value. U.S. regulators and NAV’s management declined to comment on the issue; therefore, the market is unsure about the magnitude of the change in the amount of fines.

Poison Pill

Early August, MHR Fund Management increased its stakes in NAV to 14.99%, which is marginally below the 15% mark that had earlier compelled the company to issue a Shareholder s Rights Plan in order to dilute the stakeholders’ ownerships. Following table shows the current major holdings:

Mario Gabelli’s Gabelli Funds also holds a 7.2% stake in the company. Earlier, Rachesky said that it was increasing its share in order to win some seats on the board or propose that the company be sold off. However, Rachesky declined to reveal his intentions this time around.

Earlier, Carl Icahn wanted NAV to merge with Oshkosh Corp (OSK), a commercial and military trucks manufacturer, but failed to achieve the merger.
When institutional investors increase their stakes in a company, it gives bullish signs to the market. Currently, NAV’s institutional ownership is around 90%, which is much larger than PCAR’s institutional ownership of 60%.

SEC Inquiry

Recently, the SEC reopened NAV’s records from November 2010 up till now. This news sent the stock down 13%, as it reminded investors of the last SEC inquiry in which the company was delisted from the stock exchange for 16 months. However, the sell side expects that this time around, the issue is not that serious, as large banks are involved in lending the $1 billion loan in question to NAV.

Conclusion

To some extent, the bad news has already been priced in the stock. The company has already found a solution to its engine problem, and has found ample debt to help it survive the present recessionary times, until demand for trucks in the U.S. recovers. The increasing institutional stakes in the company are sending positive signals to the market. Despite the problems surrounding its market share for trucks, the stock is expected to annually grow at 18% for the next five years.