Navistar International Corp (NAV), Cummins Inc. (CMI): Have You Already Put Your Money on This Turnaround Story?

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If only I had faith in this company. If only I had followed Carl Icahn’s footsteps. If only I had put in something in this stock. Just some of the thoughts haunting investors who gave Navistar International Corp (NYSE:NAV) a miss after a tragic 2012. After all, the beleaguered truck maker’s stock has gained a mind boggling 51% in last six trading days (till March 12) alone.

Better-than-expected numbers, a new CEO, and lots of positive thinking did it for Navistar. Management has outlined steps that it feels will help the company sail through. But, will it be as easy to convert words into action? I am not too sure.

Pedal on the new

One focus area will be new products. Navistar International Corp (NYSE:NAV) has some significant launches lined up, and it wants to make sure they hit the road on, or even before, time. The truck maker already set the ball rolling when it launched its 15-liter ProStar Plus trucks in November 2012 ahead of schedule. It was one of the most awaited launches for two reasons. One, it is Navistar’s first selective catalytic reduction, or SCR technology offer – the same technology that the company had bypassed earlier for its own adventure, which ultimately pushed it down the cliff. Two, it belongs to the critical Class 8 truck segment, where Navistar is furiously losing ground.

With ProStar Plus, Navistar also takes its relationship with Cummins Inc. (NYSE:CMI) to the next level, as the truck will be Navistar’s first to run on Cummins’ 15-liter ISX engines. It must not have been easy on Navistar though as it was working hard to get its own 15-liter engines in the market soon. The dream stands dead today. But with the ProStar Plus, Navistar has finally put to rest the tens of thousands of questions that swarmed when its ambitious emissions-technology project went bust last year with the U.S. Environmental Protection Agency (EPA) refusing certification. Now that is has decided to go for the SCR technology (not that it had other options on its plate), Navistar can hope of winning back some customers. Especially because it comes inside a Class 8 truck.

Class action

Preliminary data released by ACT Research shows Class 8 truck orders for February are at their highest point since January 2012. January 2013 was the second best month in the past 12 months, according to the research house. Which means demand for Class 8 trucks is on the rise after a relatively dull 2012. So Navistar International Corp (NYSE:NAV)’s launch has probably come at the right time. But will it be easy for Navistar to win back customers it lost while battling internal issues? Ironically, Cummins Inc. (NYSE:CMI) will be the toughest to beat.

Cummins has gained the most at the cost of Navistar. While Navistar’s, as well as Paccar Inc (NASDAQ:PCAR)’s , shares in the North American engine market fell last year, Cummins’ inched up by more than a percentage point to 40.4%. Interestingly, Paccar was also Cummins’ biggest customer, accounting for 60% of its engine sales. Cummins reportedly delivered the highest number of 15-liter engines (the same that goes into ProStar +) last year.

As for Class 8 truck sales, Navistar’s International brand was the only one to lose ground in 2012 with a 3.1% drop in sales compared to 2011. Comparatively, Daimler’s Freightliner, which was also the top seller, gained more than two percentage points in market share last year while Paccar’s Kenworth brand’s share inched 1.1%. Yes, Navistar’s warranty issues and management’s dream- plans-that-went-bust hit its reputation hard, and that’s where the game will get tough.

The staunch supporter

Navistar probably realizes that, which is why it is also ramping up its engine product line with its own 13-liter engine. It was long due, but has finally been submitted to the EPA for approval this January. After a long time Navistar sounds confident – It has already started production of Maxxforce 13 and expects to start shipping by the end of April. These engines will use Cummins Inc. (NYSE:CMI)’ SCR gear. Okay, that explains Navistar’s optimism.

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