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According to Reuters, Standard & Poor's (S&P) Ratings Services has downgraded the corporate credit rating of Navistar International Corporation (NAV - Analyst Report) to “B” from “B+”. The cut in ratings can be ascribed to the operational and financial challenges faced by the company due to the refusal of Environmental Protection Agency (EPA) to certify its engines with respect to emission standards.

Navistar has invested in research, development and tooling equipment to design engine products which will meet the EPA standard. However, without the certification of the engines the company will incorporate both its current emissions control and the competing urea-based technology.

The changeover would be increasing the costs along with production changes. Although modified engines will be marketable in 2013, their market acceptance may be somewhat challenging. Downfall in business along with escalating cost would create pressure for the company.

S&P has a negative outlook on the rating due to the expectation of operating loss for the full year. The company will also register a decline in sales of military vehicles and parts together with the deterioration in demand for medium-duty truck.

The company witnessed a loss of $137 million or $1.99 per share (excluding special items) in the second quarter of fiscal 2012. The results also missed the Zacks Consensus Estimate.

Revenues dipped 2.9% year over year to $3.3 billion, missing the Zacks Consensus Estimate. The decline was attributable to a decrease in sales in Engine and Part segments, which was partially offset by higher sales in the Truck segment.

Warrenville, Illinois-based Navistar 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 trailers. 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. The company faces difficulty in obtaining smooth supply of materials due to its over dependence on a few suppliers.

In addition, strict regulation by the government also creates pressure on the company as it generates most of its revenues from services rendered to the government. We have a long-term (more than 6 months) Underperform recommendation on the stock.

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