Why Today's Plunge in Navistar International Corp. Stock Should Scare You

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 Navistar International (NYSE: NAV  ) tumbled 6% in trade today after the truck maker reported larger than expected fourth-quarter losses, and a disappointing 2014 outlook.

So what: While Navistar reported 13% lower revenue year over year for the fourth quarter, its losses narrowed to $154 million from $2.8 billion a year ago. (No, that's not a typo.) Navistar's warranty claims on 2010 engines shot up last year even as its engine-emission technology failed to clear the Environmental Protection Agency's emission standards. The unprecedented developments landed the company in deep trouble, and customers wasted no time in switching to more reliable truck makers like PACCAR.

While Navistar's fourth-quarter loss may seem insignificant on a year-over-year basis, there's more to it than meets the eye. In fact, you should take management's reasoning behind lower revenue with a pinch of salt.

Now what: Management blamed "weaker industry conditions and lower market share during the company's emissions strategy transition" for lower fourth-quarter sales. I would read that as "lower market share" only, because the trucking market wasn't really weak during the quarter as Navistar claims.

For perspective, Class 8 net truck orders jumped 29%, 14%, and 6% year over year in September, October, and November, respectively. Remember, Class 8 is the most critical segment in the heavy-duty truck market. In fact, this September, Navistar itself bagged its biggest Class6/Class 7 truck order in two years time! Furthermore, medium-duty trucks had the best order rates in October and November since 2008, so there's no question of sluggishness there.

In short, Navistar is still struggling to win customers back as it battles low market share; and it looks like management is simply passing on the blame to industry conditions. Couple that with the fact that the company's warranty issues are far from over -- It added another $152 million to warranty reserves this past quarter -- and you have a very dicey situation at hand.

Getting Cummins' engines back on its trucks and its own 13-liter engine approved by the EPA is great news for Navistar, but investors should wait to see all that converting into higher revenue and market share before they can confidently bet on the company's turnaround.

Navistar stock has tacked on 80% this year on hopes that the company will soon bounce back, but I wonder how soon that will be. The company will likely disappoint again in its first quarter 2014, because it's also a traditionally weak period for truck makers. Worse yet, Navistar has already projected at least 30% lower cash balance for the quarter. Navistar International might be working hard to turn its fortunes around, but I think investors jumped the gun on this one.

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9/28/2016 4:02 PM
NAV $22.30 Up +0.93 +4.35%
Navistar Internati… CAPS Rating: **