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According to Reuters, Fitch Ratings has lowered the long-term debt rating and senior unsecured notes rating of Navistar International Corporation (NAV - Analyst Report) and Navistar Financial Corporation (“NFC”) to "BB-" from "BB". Fitch has also downgraded the rating on Navistar International’s senior subordinated notes to "B" from "B+."

The rating revisions were attributed to escalated warranty costs on engines, lower margins, slow growth of Navistar International’s market share of medium and heavy duty trucks in the U.S. and Canada and risks associated with emission standard of its engines.

The rating agency even predicts future reduction in ratings, if the company’s engine fails to meet the current emission standards according to the U.S. Environmental Protection Agency. Any delay or denial in certification will affect the competitive position of the company along with weakening of its financial position.

With the new engine and EGR engine technology, Navistar International plans to reduce the emissions of nitrogen oxide by not using urea. Nitrogen oxide is the pollutant responsible for asthma.

Navistar’s ratings will be under pressure if the warranty cost does not stabilize and improve. Decline in cash flows, further execution of its integration strategy and expansions in overseas markets are other challenges faced by the company. It has also adopted a poison pill strategy in order to prevent outsiders from obtaining 15% or more of its market shares.

Navistar, in the second quarter of 2012 (ended on April 30, 2012), reported a loss of $137 million or $1.99 per share (excluding special items) in sharp contrast to a profit of $102 million or $1.30 per share recorded a year ago. The results missed the Zacks Consensus Estimate of earnings of 67 cents.

Revenues went down 2.9% year over year to $3.3 billion, missing the Zacks Consensus Estimate of $3.6 billion. The decline was attributable to a decrease in sales in engine and part segments, which were partially offset by higher sales in the truck segment.

Warrenville, Illinois-based Navistar International manufactures and sells commercial trucks, mid-range diesel engines, buses, military vehicles and chassis for motor homes and step-vans. It also provides service parts for various trucks and trailer. The company is one of the largest truck producers along with Daimler AG (DDAIF) and PACCAR Inc. (PCAR - Analyst Report).

Currently, Navistar retains a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating. We have a long-term (more than 6 months) Underperform recommendation on the stock.

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