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Navistar Shares Tumble On Cost Worries

The Lisle, Ill.-based company will likely have to spend more on R&D in order to get its new engine approved by the EPA for greenhouse gas rules.

NEW YORK (AP) — Shares of Navistar International Corp. tumbled more than 15 percent Friday on investor worries that the heavy engine and truck maker will have to incur additional costs to get a crucial new engine approved by federal regulators.

THE SPARK: Before the market opened Friday, Navistar said it was in talks with the Environmental Protection Agency on a plan that will allow it to continue shipping trucks while it makes a transition to a new emission-reducing technology that will bring it into compliance with EPA requirements.

But the Lisle, Ill.-based company didn't provide any financial details of the plan, except to say that it will require more product development, resulting in additional short-term costs.

THE BIG PICTURE: Navistar said its new technology will meet 2010 EPA emissions regulations and help position the company to meet greenhouse gas rules ahead of 2014 and 2017 requirements. The new technology is expected to be available beginning in early 2013.

Navistar has struggled this year amid the uncertainty surrounding whether its Class 8 engine, which is used in the largest commercial trucks, will get EPA approval. Last month, the company reported a net loss of $172 million for the second quarter, pulled down by $108 million in losses at the engine division, and slashed its full-year earnings forecast to a fraction of its previous range.

Navistar said that while the transition will require some additional product development, resulting in additional costs, it will try to offset some of those costs through pricing. In addition, the new technologies will help reduce costs and expand margins in the long term, Navistar said.

The company added that its cash position remains stable and it believes that it would have access to additional financing sources if they were needed. It declined to release specific information about its finances until a deal with the EPA is struck.

Meanwhile, Navistar's continued drop in share price also has made it a takeover target. Last month, Navistar adopted a shareholder rights plan, after the hedge fund MHR Fund Management LLC and billionaire investor Carl Icahn both boosted their stakes in the company.

A Navistar spokeswoman declined comment on Friday's stock drop, saying that the company doesn't comment on daily stock movements.

THE ANALYSIS: Jefferies analyst Stephen Volkmann backed his "Buy" rating, but cut his 2012 through 2014 earnings estimates for Navistar, saying that the company's market share and margins will be lower than he previously expected.

"Clearly the prospects for continued non-compliance penalty payments and increased research and development spending were not in Navistar's most recent earnings guidance," Volkmann wrote in a note to investors.

Baird's David Leiker backed his "Neutral" rating for the stock, saying that while the new technology approach appears to be a step in the right direction and will improve the company's chances of getting EPA certification, investors might want to hold off on buying shares until its near-term financial outlook becomes clearer.

THE SHARES: Down $4.56, or 15.8 percent, to $24.23 in heavy afternoon trading, after falling as low as $24.04 earlier in the day. Over the past 52 weeks, the company's shares have traded between $20.21 and $57. Over the past five months, the company's shares have lost about 39 percent of their value.

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