Why Navistar Shares Imploded

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of U.S. truck and engine manufacturer Navistar (NYSE: NAV  ) are backfiring badly today, with shares down as much as 28% after the company reported a worse-than-expected second-quarter loss.

So what: Today's loss doesn't come as a surprise, as Navistar had cautioned that warranty repairs to engines built in 2010 and 2011 would eat into its bottom line. Unfortunately, the claim the company had made that warranty claims had peaked in March turned out to be false and Navistar reported a loss of $2.50 per share, reversing a $0.93 profit one year ago. Navistar is also waiting for the Environmental Protection Agency to finish its review process of nitrogen oxide emissions in its newer heavy-duty truck engines with no timetable on when that will be completed. Add all of this together and Navistar forecast full-year EPS of breakeven to $2 versus its initial forecast of $5.00 to $5.75 and Wall Street's expectation of $3.73.

Now what: Usually I would say something here about these losses being predominantly one-time events, but in this case the thesis doesn't hold water. Even after Navistar is done with its warranty claims on engines from 2010 and 2011, its newer truck engines will remain under the EPA's watch. Also, management's inability to forecast how badly claims would affect the company's bottom line throws into question how much we can trust their earnings guidance. Given that revenue fell 2% and problems are still piling up, I can wholeheartedly slap the yellow caution tape around Navistar and be happy with myself at the end of the day.

Craving more input? Start by adding Navistar to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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