One of the biggest Navistar critics, Gimme Credit analyst Vicki Bryan, still has her “sell” on Navistar, but with an asterisk: It all depends on what the company says on Friday.
Navistar’s stock rose Tuesday as investors reacted to the company’s 8-K SEC filing disclosing that it will hold a pre-market conference call Friday “to provide an update to various operational matters related to the Company.”
Based on the various issues facing Navistar, “operational matters” could be almost anything—and if it’s something really significant would seem to be an understatement.
But the betting based on various industry reports, regardless of whether it is what the company says on Friday, is that it is likely to move away from the controversial Exhaust Gas Recirculation, or “EGR” technology that Navistar has bet its fortunes on. The rest of the industry uses more conventional Selective Catalytic Reduction, or SCR, technology.
The Wall Street Journal, quoting one source, went so far as to say the company will “announce that it will buy SCR components and install them on its own engines.”
Which gets us back to Bryan, who is among the most bearish Navistar analysts (perhaps because she views it from the credit side of the ledger). In recent reports she has suggested bankruptcy as a credible option for Navistar. She still thinks it is, depending on whether the company discloses something that can genuinely get Navistar out from under. (Related: Top Bankruptcies)
Her sense is that the company believes whatever it announces is likely to be viewed as positive. Otherwise, she reasons, why would it have a call? (Of course, I could argue: If it was really positive, wouldn’t it have waited until Monday—when most people will be back to work?)
Either way, here is what she believes would be genuinely positive:
- An announcement that the company will abandon its controversial EGR engine. The engine has not won EPA approval and has been riddled with high-warranty cost issues.
- The departure of CEO Dan Ustian, the EGR engine’s biggest promoter.
- A big asset sale to raise the cash that will be needed to transition to a new engine, which some have speculated would result in resorting to engines built by rival Cummins. “While we have suggested Oshkosh as a likely buyer for the military group,” she says, “we think Cummins might be a logical buyer for the medium duty trucks group.” Such a deal, she says, could be part of a Cummins engine deal. She believes a mere joint-venture, with a company like Cummins , would not be enough.
- The possibility of a “friendly” sale brokered, perhaps, by activist investor Carl Icahn, who owns 11.9% of the company’s stock.
And we haven’t even talked write-off of EGR assets, which could be significant.
“Indeed,” Bryan says in a research note put out earlier this week, “Friday may prove to be one of the most important days in the history of Navistar.”
Not-so-positive, she says, would be any move to jerry-rig the existing EGR engines with SGR parts. Such a plan, she believes, would be a costly patch that could further devalue the company as its cash continues to be drained.
“Any news in the Friday call short of a convincing resolution to its problems will be disappointing—further evidence that this management team may not be capable of keeping the company afloat,” she says.
Put another way, for this to really matter, this has got to be something better than a mere update to “operational matters.” If ever there were a need for the company to under-promise and over-deliver, just the opposite of what it has done in recent years, this would appear to be it.
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