Morningstar | Initiating Coverage on No-moat Navistar with a FVE of $28.50 and Extreme Uncertainty Rating
We are initiating coverage on truck and school bus manufacturer Navistar with a no-moat rating and a fair value estimate of $28.50. Navistar is famously known for having pursued an unconventional diesel emissions technology, exhaust gas recirculation, or EGR, to meet EPA requirements, which ultimately failed and led to numerous lawsuits with regulators and customers. It subsequently abandoned its proprietary EGR technology and adopted industry-standard selective catalyst reduction, or SCR, in 2012. The company now takes a more conservative approach to product development, instituted cost containment initiatives, and formed important partnerships with GM and Traton. While Navistar has made steps to improve its brand image, which is a critical component of moat formation in the heavy equipment space, there remains lingering acrimony among carriers affected by defective Navistar engines. These suits have persisted, with the latest jury award against Navistar occurring in March 2019.Our recent research of truck manufacturers identified unique customer loyalty given only to Paccar's Kenworth and Peterbilt brands, which enables Paccar to develop a moat. This helps to explain why Paccar hasn’t had an annual loss in 80 years while Navistar has suffered 14 years of losses in the past three decades. Most brands sold in North America, including Freightliner/Western Star (Daimler), Volvo/Mack, and International (Navistar), offer largely undifferentiated products with low switching costs.
In recent quarters, a strong heavy-duty truck market helped Navistar recover from a post-EGR downward spiral. After significant cost-cutting, Navistar was modestly profitable in 2017 and 2018. Current expenses and capital expenditures are below 2008 levels. Its joint venture with Traton may further extend its cost-cutting initiatives. However, we believe Navistar will need to expand its research and development costs along with capital expenditures to develop alternative powertrains.
Navistar International is a holding company. Through its subsidiaries, the company is a manufacturer of International? brand commercial trucks, proprietary diesel engines, and IC Bus? (IC) brand school and commercial buses. The company's segments include: Truck, which manufactures and distributes trucks and buses along with production of proprietary engines; Parts, which provides proprietary products to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business; and Global Operations, which consists of the operations of its subsidiary, International Industria Automotiva da America do Sul Ltda that manufactures and distributes mid-range diesel engines.
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