- Icahn-backed company refocuses on construction-vehicle segment
- Wall Street investors watching bonds as `liquidity risks' loom
Navistar International Corp. is introducing its first new trucks in six years, just as Wall Street is wondering if the company that counts billionaire Carl Icahn as its biggest investor has enough cash to survive.
At the World of Concrete trade show in Las Vegas on Monday, Navistar was scheduled to unveil a line of premium work trucks called International HX. With up to 600 horsepower, the behemoths are designed to roar around construction, mining and drilling sites with specialized equipment like cranes or cement mixers mounted on their backs.
Navistar had to kill most versions of its so-called premium vocational trucks in 2010 because they lacked diesel engines that could comply with federal emissions limits. Overall, the company’s pollution-control strategy failed so miserably that its market share has dropped by half since 2009 -- to 10.4 percent of U.S. heavy-duty truck sales in December.
By beefing up its work-truck offerings now and redesigning its entire lineup -- including long-distance freight haulers -- by 2018, Navistar hopes to demonstrate that it’s recovering through smart engineering and not just plant closings, Chief Executive Officer Troy Clarke said in an interview.
“This is the first tranche of investment that’s not focused on a do-over,” said Clarke, 60, a former General Motors Co. executive who’s run Navistar since 2013. “It’s focused on creating the future.”
The question is whether Clarke will have enough time, especially because his new products are arriving after heavy-duty truck sales have peaked. Industrywide U.S. production could fall 20 percent in 2016, Clarke said.
To add even more pressure, a pair of activist investors -- Icahn and Mark Rachesky -- have accumulated almost 40 percent of Navistar’s shares. Starting in 2011, Icahn paid an average of $33.79 for each of his 16.3 million shares, according to Bloomberg data. The stock closed at $7.27 a share on Friday and is down 48 percent since Dec. 1. Icahn declined to comment on his Navistar investment.
The company’s 8.25 percent bonds due in November 2021 yielded 19.4 percent on Friday, rivaling the borrowing costs of subprime credit cards.
“Should the economy take a turn for the worse, Navistar could see liquidity risks,” said Brian Sponheimer, a Gabelli & Co. analyst in Rye, New York. “It’s a very real concern.”
During the quarter ended Oct. 31, Navistar’s sales fell 17 percent to $2.49 billion, trailing the $2.55 billion average analyst estimate. The Lisle, Illinois-based company fell on hard times after spending more than a decade embracing an exhaust-gas recirculation technology to cool its engines and lower nitrogen oxide emissions. Rivals like Cummins Inc. and Paccar Inc. lower NOx by injecting urea-laced water into exhaust gases in a method called selective catalytic reduction.
Navistar abandoned the recirculation technology as unworkable in 2012 and adopted the same approach as its rivals. But to this day, it remains saddled with bloated warranty costs and subsidies for the resale value of EGR-equipped trucks that their owners want to trade in, Clarke said.
To stop the bleeding, the CEO cut a quarter of the workforce, leaving 13,900 currently. In December, he told Wall Street that the company expects to generate a profit and positive cash flow in 2016. That, plus $1.1 billion in cash and marketable securities, mean Navistar has plenty of liquidity, Clarke said.
The premium HX trucks that Clarke is introducing Monday will sell for $110,000 apiece on average. They come with big windshields and contoured hoods and fenders to allow maximum visibility for drivers. Their front wheels can turn at a 40-degree angle to maneuver around construction sites. They use wireless technology to upload the results of continuous diagnostic tests, and automatically search dealer inventories for repair parts, if necessary.
In case the new products don’t generate enough cash fast enough, investors are watching Navistar’s 2021 bonds, said Joel Levington, a Bloomberg Intelligence credit analyst. If Icahn starts buying the debt, Levington said, it could mean he wants a more secure position in the capital structure. And that could presage a restructuring that could wipe out all remaining equity.
Despite his liquidity concerns, Sponheimer of Gabelli has a buy rating on the stock. Gabelli is an affiliate of Gamco Investors Inc., which held 9.8 million Navistar shares in September.
Assuming Navistar survives the commercial-truck slowdown, its industry-leading dealer network should -- all by itself -- make the company an attractive takeover target for an array of truck and construction equipment manufacturers in Asia and Europe, Sponheimer said.
Clarke acknowledged that the capital structure of the company could change.
“We’re working to re-create that great American truck company,” he said. “We’re making a lot of progress really fast. And someday, that will make us an even more attractive partner.”