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Legendary activist investor Carl Icahn has set his sights on a new target: Truck-maker Navistar International (NYSE: NAV ) . Navistar has been struggling over the past few years, as it defied the trucking industry in pushing forward an engine technology that eventually failed. That doesn't sit well with the company's largest shareholders. Icahn and his ally, former employee and protege Mark Rachesky, together own around 30% of Navistar's shares, and have recently won the right to appoint three seats on Navistar's ten-member Board of Directors. The two have big plans to profit from their investment: Should you invest along with them?
Carl Icahn is known for taking big positions in companies, leading proxy fights to wrest control away from management teams he deems incompetent, and installing loyal directors who will lead the target company in a new direction. His successful record as an investor --(with a $14 billion net worth, he is one of the richest men in the world) -- shows that he knows how to unlock value, and the simple announcement that Icahn has taken a big position can make a stock price surge. In recent weeks, it seems that Carl Icahn has made turning Navistar around his most important priority.
Navistar got into trouble after former CEO Daniel Ustian led the company to pursue an engine technology to control gas emissions that ultimately failed to pass EPA regulations. Navistar lost a decade of development time, loads of cash, lots of customers, and was essentially pushed to the brink of survival, with shares at five-year lows. Navistar took a few measures to ensure its short-term future: Ustian was given the boot, and the Board secured a large loan from a consortium of lenders. After the Environmental Protection Agency increased the fine on Navistar's non-compliant engines, Navistar also decided to buy engine technology from rival Cummins (NYSE: CMI ) .
This was a great coup for Cummins. Navistar, which produces engines as well as truck bodies, used to compete in the engine business with stand-alone engine-maker Cummins. Now, starting in 2013, Navistar will buy 15-liter engines from Cummins to use in its trucks, as well as buy after-treatment solutions from Cummins to keep its own 13-liter engines EPA compliant. Even though the move was embarrassing for Navistar, it did allow the company to keep its most important customer relationships intact as the company attempts a turnaround.
The direction that Icahn intends Navistar's turnaround to take became more apparent on Thursday, when Icahn made an unsolicited offer to buy out specialty truck-maker Oshkosh (NYSE: OSK ) , a leading manufacturer of military vehicles, fire trucks, concrete mixers, and garbage trucks. Icahn, who already owns nearly 10% of Oshkosh, offered $32.50 a piece for "any and all" shares, a 20% premium to their opening price Thursday.
The move comes nearly a year after Icahn first suggested that Navistar and Oshkosh would both be more valuable if they merged. The idea is that the combined entity would benefit from greater scale and reach, and the elimination of redundant functions, could cut costs and boost profitability. At the time, Navistar seemed open to the idea, but Oshkosh was not. If Icahn can take full control of the company, a merger is back on the table.
These developments are probably good for both companies. If a merger does go through, Oshkosh's volatile defense segment will be nicely complemented by Navistar's more stable commercial freight truck operations. For Navistar, a marriage with Oshkosh would make the company's financial future look much more stable. It would be easier for Navistar to raise cash to fund ongoing operations, and valuation multiples for the company could expand. Right now, investors are valuing Navistar shares at a paltry two times cash flow, compared to a five-year average of three times cash flow, and an industry average of nine times cash flow.
Even if the merger fails, however, the attention this effort has garnered may force investors to look beyond recent mistakes and into Navistar's future. The company has stumbled badly, but is now back on the road to profitability. Even with a permanently reduced market share, Navistar has a sound business model, and shares are worth more than they are trading for now. Navistar even has some exciting plans to reverse its losses, and take market share back.
Navistar is the only major truck supplier to partner with Clean Energy Fuels (Nasdaq: CLNE ) , a natural gas fueling infrastructure provider. Navistar and Clean Energy Fuels signed an agreement in February to make it easier for Navistar's customers to make the switch from diesel to natural gas, which is not only cleaner, but also significantly less expensive as a fuel source. Clean Energy Fuels is building out a network of compressed and liquid natural gas fueling stations that will allow long-haul freight trucks to refuel on natural gas on cross-country routes.
With Navistar in on the ground floor, the success of Clean Energy Fuel's "Natural Gas Highway" could allow the truck maker to recapture customers. You can read more about these plans for natural gas infrastructure in the Motley Fool's premium report on Clean Energy Fuels. This report is only available for a limited time, so click here to get your copy today.