Market Insider

Sharks Circling Navistar: Greenberg


The betting among Navistar watchers is that something has got to happen.

Navistar Logo

Either the company has to be acquired, restructured and/or its board and/or management has to go.

This much is clear: Dealmakers, analysts and competitors smell blood, and management may be better off selling than risking being tossed out.

Investor Carl Icahn last week boosted his Navistar stake to 12 percent from 10 percent and in recent days names like Fiat and Volkswagen have surfaced as possible buyers of the company. JPMorgan’s Ann Duignan, in her upgrade of the stock to a neutral from underperform, mentioned the deal chatter and even trying to put a value on the company.

But in the end, Navistar appears to be the classic case of yet another company whose highly touted, controversial efforts to shake up an industry backfired (this one, with quite the blast.)

In this case, the mistake was Navistar’s veering from industry standard with a new engine technology that hasn’t been able to get EPA certification and has led to costly warranty repairs. Last quarter, in part because of the warranty costs, Navistar reported an unexpected loss and for the second consecutive quarter guided well below expectations.

“The issue is a very simple one,” says independent industry analyst Oliver Dixon of West End Companies." Navistar needs to produce a market ready, market acceptable and legally compliant engine, and it needs to do so quickly. This engine needs to work, and buyers need to buy it. If this does not happen, it will serve only to increase both the confusion that surrounds the company and questions regarding the credibility of its senior management.”

Reality is: CEO Dan Ustian's credibility is already on the line, with Jefferies analyst Stephen Volkmann leading the charge on the company’s recent earnings call.

“The simple question is, how long do you as CEO let this thing go on?” he asked. “You are losing market share. It's obviously starting to impact the core business. The warranties have been off the charts so even what you've got out there hasn't been working very well. There are other solutions to this problem that are fairly simple. And yet you guys just continue to take these punches to the gut. As CEO, at some point you have to decide how long this thing goes on.”

Ustian responded: “We aren't losing market share, Steve. We aren't gaining any. We have to get this behind us and then we will turn this around and get this thing where it's going the other way. And that's what our target, to have us distracted into something else is probably not conducive to the longer-term objectives.”

Yet while he was saying that, the company recently realigned top management below Ustian. Pointing out that those promoted are younger than he and his team are, Ustian told analysts: “Some succession throughout the company is in our thought process.”

It goes deeper than that. A peek at page 25 of the company’s slide showduring the earnings call may be the biggest clue of all: The only jobs reporting to Ustian and his CFO A.J. Cederoth, who are tucked off in the corner of the slide, are “support functions.”

The real question boils down to this: Will Ustian sell or leave? As JP Morgan’s Duignan points out, he’s better off personally if he sells. According to his contract, he would get $18 million if he loses his job because of a sale.

“On the other hand,” Duignan points out, “should the CEO or other major officers be laid off due to performance reasons, the officers (including the CEO) would receive the only value of unused vacation and any vested stock options, with no cash severance.”

My take: No brainer. And besides, it's better to see the fins while still on the ship rather than the life raft. Of course, with billions in pension and warranty liabilities there is no guarantee the ship won't sink first.

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