Navistar International Corp., the maker of International brand trucks, fell the most in more than 3 1/2 years after saying it expects additional costs to introduce an engine that will meet U.S. emission standards after its earlier technology failed to comply.
Navistar plunged 15 percent to $24.42 at the close yesterday in New York, the biggest drop since Nov. 12, 2008. The shares have declined 36 percent this year on top of a 35 percent slide in 2011. The decision to develop its own engine hurts the odds that the company will be taken over by a competitor, an analyst at Vertical Research Parters said yesterday in a report.
Navistar said the engine, called In-Cylinder Technology Plus, adds “urea-based aftertreatment” to its exhaust gas recirculation, or EGR, technology to meet 2010 U.S. Environmental Protection Agency rules. A 13-liter engine will be available in early 2013, with a 15-liter engine to follow, the company said in a slideshow presentation.
“We will need to expand our product development efforts, but we will work hard to minimize this incremental spend,” Chief Financial Officer Andrew Cederoth said on a conference call, during which the company did not take questions from analysts. “When we launch, we anticipate some incremental cost to accommodate the additional hardware.”
The failure of the company’s previous engines to comply with EPA regulations helped trigger a fall in the shares and make Lisle, Illinois-based Navistar, which also makes commercial and military trucks as well as buses, a potential takeover target.
“The current path of the board/management seemingly makes a hostile bid necessary; with Navistar’s technology and warranty issues a hostile bid is risky,” Rob Wertheimer, the Vertical Research analyst, wrote yesterday in a report in which he downgraded the company to hold from buy.
The company is a “natural fit” for Volkswagen AG, which controls truck makers MAN SE and Scania AB, or Fiat Industrial SpA, Wertheimer wrote yesterday in an earlier note.
Navistar invested $600 million to develop EGR heavy truck engines, which failed to meet the 2010 rules. The U.S. Court of Appeals in Washington on June 12 threw out a U.S. EPA interim rule that allowed Navistar to keep selling noncompliant engines if it paid penalties of as much as $2,000 each.
“There’s no question that there are going to be some issues here,” David Leiker, an analyst at Robert W. Baird & Co. in Milwaukee, said yesterday in a telephone interview. “They’re probably going to have to discount the current technology to sell it until the new technology is available, and then there’s the cost to bring this new technology to market. It’d be nice for them to clarify that, but it’s not going to happen today.”
Leiker rates Navistar shares neutral.
Navistar didn’t clarify where it stands with EPA certification of EGR engines or what fines it will have to pay until the new engine is ready, Brian Sponheimer, an analyst at Gabelli & Co. in Rye, New York, said in a phone interview.
The new engine “reduces some tail risks to the company, specifically as it relates to bankruptcy and being left with a stranded strategy in the months ahead,” said Sponheimer, who recommends buying the shares. The conference call “begged more questions than it answered,” he said.
The EPA and California Air Resources Board are “supportive” and “willing to engage immediately” in reviewing the engine’s performance, according to Navistar’s presentation. The company said it’s in discussions with regulators about assuring uninterrupted sales during the transition to the new engines.
Navistar should have announced a dual-sourcing strategy using its own technology along with engines from Cummins Inc., Sponheimer said. Navistar’s shares surged 11 percent on June 29 after OTR Global LLC said the company may start offering engines from Columbus, Indiana-based Cummins.
“That would have been a home run,” Sponheimer said. “What the company provided today was an infield single. Providing its customers a choice of engine could only help its market share and help leverage truck platforms.”
Billionaire investor Carl Icahn increased his stake in Navistar to 11.9 percent in June and hedge fund manager Mark Rachesky disclosed a bigger position, 13.6 percent, as Navistar slumped to a three-year low last month, prompting the company to adopt a poison pill to help fend off hostile bids.
Navistar last month lowered its full-year profit forecast to a range of break-even to $2 a share, excluding some costs. In February, the company forecast 2012 profit of as much as $5.75 a share, then reduced the figure to a maximum of $5.25 a share in March.
“It would be best to allow the process with the EPA to come to completion before we comment further on our financial forecasts,” the company said in its presentation. “As to liquidity, our current position remains stable, and we believe we have access to additional financing sources if appropriate.”