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On Mar 14, we downgraded Navistar International Corporation (NAV - Analyst Report) to Underperform based on the supplier risk faced by the company owing to higher dependence on few suppliers of components and mounting research and development expenses on the back of stricter regulations by the government.

Why the Downgrade?

Navistar recorded a loss of $114.0 million or $1.42 per share in the first quarter of fiscal 2013 (ended Jan 31, 2013), which was narrower than $144.0 million or $2.06 per share in the year-ago quarter. Loss per share was also narrower than the Zacks Consensus Estimate of a loss of $1.63 per share.

Navistar’s revenues declined 12.4% year over year to $2.6 billion in the quarter, missing the Zacks Consensus Estimate of $2.8 billion. The year-over-year decline in revenues was due to sluggish industry demand and lower market share of the company due to its transition to clean engine systems as per EPA regulation.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 has gone up 6.4% to a loss of $2.50 per share. The Zacks Consensus Estimate for 2014 has also improved 19.4% to $2.59 per share.

Navistar has to bear the brunt of increased expenditure due to the investment in research, development and tooling equipment to design engine products, which will meet the Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) emission, noise and safety standards.

In addition, Navistar faces significant supplier risk, owing to higher dependence on few suppliers of components. Navistar sources materials and components from third-party suppliers and some of them are the sole source for a particular supply item.

Other Stocks to Consider

Few stocks that are performing well in the industry where Navistar operates include STRATTEC Security Corporation (STRT - Snapshot Report), Gentherm Incorporated (THRM - Snapshot Report) and Oshkosh Corporation (OSK - Snapshot Report). Strattec Security and Gentherm are Zacks Rank #1 (Strong Buy) stocks while Oshkosh carries a Zacks Rank #2 (Buy).

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