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On Jul 3, we maintained our Neutral recommendation on Navistar International Corp. (NAV - Analyst Report). We appreciate the company’s leading position in the global truck market and steady revenue stream from government contracts. However, we are disappointed about its wider loss in fiscal 2013-second quarter and rising pressure on revenues owing to the transition to clean engine systems as per EPA regulation.

Why the Reiteration?

On Jun 10, Navistar reported a wider loss of $353 million or $4.39 per share in the second quarter (ended Apr 30, 2013) compared with $137 million or $1.99 per share (excluding special items) in the year-ago quarter. Reported loss was also significantly wider than the Zacks Consensus Estimate of a loss of $1.09 per share. Lower volumes and higher pre-existing warranty adjustments, related to EPA 2010 emissions level engines, primarily dragged down the profits.

Revenues declined 22.5% year over year to $2.5 billion in the quarter, missing the Zacks Consensus Estimate of $2.9 billion. The year-over-year decrease in revenues was due to a decline in industry demand and lower market share of the company.

Following the release of the second quarter results, the Zacks Consensus Estimate for 2013 has gone down more than threefold to a loss of $7.80 per share from the previous estimate of a loss of $2.40. The Zacks Consensus Estimate for 2014 declined 30.3% to $1.54 per share.

Navistar generates a significant amount of revenues based on contract wins from the U.S. government. The U.S government contributes about 25% of the company’s revenue and the contracts are on long-term basis.

In addition, the company is focusing on different joint ventures, which will help it expand globally. Further, business acquisitions will also have a favorable impact on the company.

However, Navistar has to bear the brunt of increased expenditure due to the investment in research, development and tooling costs, which will meet the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) emission, noise and safety standards. The company also faces significant supplier risk, owing to higher dependence on some suppliers of components.

Other Stocks to Consider

Some stocks that are performing well in the same industry where Navistar operates include Visteon Corp. (VC - Snapshot Report), Magna International Inc. (MGA - Analyst Report)) and Johnson Controls Inc. (JCI - Analyst Report). Visteon and Magna carry a Zacks Rank #1 (Strong Buy), while Johnson Controls has a Zacks Rank #2 (Buy).

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