What's driving Navistar?

Diesel engines, military orders leading growth

February 3, 2009, BY TED PINCUS - Chicago Sun Times:

On the bleak, bloody landscape of the world's motor vehicle makers -- with most icons on their knees -- is there a manufacturer on the move?

I mean, is there one actually showing sustained growth in sales and earnings? One whose hand is not out begging for a bailout?

Look no further than right here in Chicago, where another bright discovery can be found in my continuing hunt for The Recession Beaters: Navistar International Corp. (NAV). How can they defy gravity? What's the secret? After some sleuthing and a wide-ranging discussion with CEO Dan Ustian, I can attest that the answer lies in agility. Navistar is a model demonstration of how constant repositioning can keep you one step ahead of the competition, shifting tides and even a global economic meltdown.

Navistar may well be in its ninth life. Born with Cyrus McCormick's reaper in 1827 and emerging as International Harvester to dominate farm equipment for over a century, the firm saw sagging fortunes in the pasture in the '70s. Slimming way down from 110,000 employees to 10,000 in the '80s, it literally shifted gears to exploit its expertise in heavy vehicles, concentrating on commercial truck and bus production plus development of some of the world's foremost diesel engines. Today, its 17,000 employees have made it the No. 1 medium-weight commercial truck maker, No. 2 big highway truck maker, No. 1 maker of armor-protected military trucks, school buses and medium-duty diesel engines.

The military segment, Ustian points out, only evolved since 2002, as Navistar stepped up to the plate to apply its technology to the awesome new era of terrorist attacks on transportation and the horrific threat of roadside bombs. In a striking reversal of turn-your-swords-into-plowshares, this granddaddy of motorized farming turned its terrain-savvy into vehicles to protect the free world. With conditions ever more critical in Iraq and Afghanistan, two major orders just arrived from NATO, and Ustian predicts that this year the majority of his truck revenue will come from outside North America.

"In effect," he says, "in a very short time we're significantly changing the military truck industry by being agile enough to mass produce trucks that can still be individually customized in response to field conditions."

But it's in the realm of diesel engines -- where Navistar is in a tight race for No.1 with Cummins -- that Ustian's acrobatic team is proving ferocious. With the industry hellbent on creating smaller, more powerful engines, but also meeting increasingly tough fuel economy goals and emission limits, Ustian's bold bets of $400 million in annual R&D investment are paying off. "We're now the only producer that's ahead of the 2010 emission standards which pose a major barrier to many. It radically tightens the 2007 standard of 1.2 parts per million-per-hour to only .5 parts per million-per-hour. We've done it by developing the only engine using internal combustion [rather than external converters] to capture the emission," he says. "Moreover, our EGR [exhaust gas recirculation] concept is coupled with an engine that is 100 pounds lighter than the others."

Thus, in the face of unprecedented global economic turmoil, Ustian, 58, a career executive at Navistar, is one motor man with confidence. He sees net income for the current fiscal year ending Oct. 31 to be a healthy $370-$410 million or $5.10-$5.60 per diluted share, on $15 billion in revenues. He agrees with street estimates that net in the 2010 fiscal year could continue upward to the $6.78 area on even higher sales volume.