July 1, 2008 / 5:55 AM / 11 years ago

ANALYSIS-Navistar return to NYSE gets rude welcome

By James B. Kelleher

CHICAGO, June 30 (Reuters) - Navistar International Corp’s (NAV.N) return to the New York Stock Exchange on Monday after a year-long exile to the Pink Sheets did not generate the warm reception the company’s management undoubtedly hoped for.

Navistar shares ended the session down 4.95 percent at $65.82 — wiping out most of the gains made on Friday after the truck and engine maker said its financial reporting was finally current and its stock would be relisted on the so-called Big Board.

Analysts said the yo-yo trading reflects continued uncertainty about Navistar’s outlook.

By bringing its long-delinquent books up to date, the company has passed another milestone in its rehabilitation, a journey that began two-and-a-half years ago with the discovery of massive accounting errors that wound up costing the company billions of dollars.

But the Warrenville, Illinois, company still has more work to do. Among the challenges: Shoring up a capital structure that is, according to Eli Lustgarten of Longbow Research, “big on short term debt” — a good chunk of it coming due in 2012.

“You have to give them credit where credit is due,” Lustgarten said. “But the next question to me is how do they rebuild their balance sheet?”

Standard & Poor’s gives Navistar debt a below investment grade BB- rating — with a negative outlook. All the company’s competitors, including Paccar Inc (PCAR.O), Volvo AB (VOLVb.ST) and Scania AB SCVb.ST, earn investment grade ratings from S&P.

Gregg Lemos-Stein, an S&P credit analyst, said the rating reflects concern Navistar is “aggressively leveraged” when its debt is compared to its operating income.

The good news is that many of Navistar’s credit agreements, which were made with banks after its financial problems surfaced, were inked in 2007 — before credit markets froze up. So Navistar enjoys better rates than many corporate borrowers.

The bad news is that a big chunk of its paper needs to be refinanced simultaneously.

“Generally, we’d like to see a more evenly spread maturity structure,” Lemos-Stein said.


Another challenge Navistar and its rivals face is how to cope with soaring commodity prices, especially for metals, while in the middle of what Moody’s analyst Bruce Clark calls an “ugly truck market.”

Would-be truck buyers, already squeezed by record fuel prices, weak freight volumes and industry overcapacity, are in no mood to accept price increases from truck makers.

“There isn’t a silver lining out there,” says Clark, who’s company pulled its credit rating of Navistar two years ago. “It’s going to be a tough year.”

Navistar’s problems are not confined to big and medium size commercial trucks. It is engaged in a complicated but bitter legal fight with Ford Motor Co (F.N) over pricing and warranty claims related to diesel engines Navistar has supplied for the carmaker’s F-150 pickup line for nearly 30 years.

Those were once the best-selling vehicles in the U.S. market. Now they are suddenly white elephants on dealer lots, squeezed by fuel prices and the housing-led economic weakness.

During a conference call with investors on Monday to discuss the company’s results for the first six months of fiscal 2008 and celebrate the company’s return to the NYSE, Dan Ustian, Navistar’s chairman, president and chief executive, described the U.S. pickup market as being in a “stranglehold.”

Another head wind for the relisted Navistar is its share price, which has nearly tripled during the 30 months since its accounting troubles began and handily outperformed the S&P 500. But that has come even as the North American commercial truck market has experienced two tough years.

In 2006, the year Navistar’s troubles began, the industry produced a record 378,000 of the largest commercial trucks, according to A.C.T. Research. In 2007, the number fell to just 212,000 so-called Class 8 trucks — and A.C.T. is forecasting the industry will see orders for only 234,000 in 2008.

As a result, analysts say it is difficult to imagine the company’s stock will rise a lot as it continues its journey back from the brink, especially given the tough state of its core truck market in the United States and Canada.

“The truck market is in a depressed state,” Lemos-Stein said. “It’s getting even softer because of diesel prices. Inventory is high at the dealers. So we don’t feel there will be any rebound of any consequence in the truck markets until the end of the year at the earliest.”

(Editing by Peter Bohan and Andre Grenon)

((james.kelleher@thomsonreuters.com +1 312 408 8130; Reuters Messaging: james.kelleher.reuters.com@reuters.net)) Keywords: NAVISTAR/

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