Navistar International Corp.

February 06, 2015 Navistar International Corp. Current Recommendation NEUTRAL Prior Recommendation Underperform Date of Last Change 05/22/2013 Current Price (02/05/15) $28.13 Target Price $30.00 SUMMARY DATA (NAV-NYSE) SUMMARY Navistar reported fourth-quarter adjusted net loss of $38 million or $0.46 per share, significantly narrower than $132 million or $1.64 per share in the year-ago quarter. Also, the loss per share was disappointing considering the Zacks Consensus Estimate of a profit of $0.03. Revenues increased 9.3% year over year to $3.01 billion in the quarter, marginally missing the Zacks Consensus Estimate of $3.03 billion. The company is poised to benefit from product launches and cost-saving initiatives. However, we are concerned about economic uncertainty in Brazil and strict EPA regulations, which are likely to impact profitability. Thus, we have maintained the Neutral recommendation on the stock. 52-Week High $39.83 52-Week Low $28.13 One-Year Return (%) -19.17 Beta 2.24 Average Daily Volume (sh) 864,942 Shares Outstanding (mil) 81 Market Capitalization ($mil) $2,279 Short Interest Ratio (days) 10.93 Institutional Ownership (%) 75 Insider Ownership (%) 19 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) -3.0 Earnings Per Share (%) N/A Dividend (%) N/A using TTM EPS N/A using 2015 Estimate 52.1 using 2016 Estimate 8.2 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock N/A Industry Auto/Truck-Orig Zacks Industry Rank * 73 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 2,637 A 2,526 A 2,861 A 2,751 A 10,775 A 2014 2,208 A 2,746 A 2,844 A 3,008 A 10,806 A 2015 2,678 E 3,027 E 3,089 E 3,195 E 11,989 E 2016 3,114 E 12,934 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 -$1.42 A -$4.39 A -$2.94 A -$1.80 A -$10.55 A 2014 -$2.15 A -$0.82 A -$0.15 A -$0.46 A -$3.55 A 2015 -$1.17 E -$0.16 E $0.80 E $1.07 E $0.54 E 2016 $0.19 E $3.45 E *Note: EPS in 2014 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % 15 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW Based in Illinois, Navistar International Corporation (NAV) manufactures and markets International brand commercial and military trucks, MaxxForce branded diesel engines and IC Bus ("IC") branded school and commercial buses. The company also provides service parts for trucks and diesel engines. Navistar is one of the largest truck producers after Daimler and PACCAR Inc. Navistar operates through four industry segments, North America Truck Segment (65.5% of total revenue in fiscal 2014), North America Parts Segment (23.3%), Global Operations Segment (14.4%) and Financial Services Segment (2.1%). Segment revenues do not add up to 100% due to Corporate and Eliminations. The North America Truck segment manufactures and distributes medium and heavy-duty trucks (Class 4-8), military vehicles and buses in the North American markets including the U.S., Canada and Mexico. The products are distributed under the International and IC brands. The segment also designs engines under the MaxxForce brand name. The Global Operations Segment consists chiefly of the operations of the company s wholly owned subsidiary, International Indústria de Motores da América do Sul Ltda. (IIAA) in Brazil and truck and parts export businesses under the International and IC brands. The North America Parts Segment supports the brands of International commercial and military trucks, IC buses, MaxxForce engines, as well as the other product lines. The segment provides proprietary products as well as standard truck, trailer and engine service parts. The Financial Services Segment provides retail, wholesale, and lease financing of products sold by the North America Truck and North America Parts segments, as well as their dealers in the U.S. and Mexico. REASONS TO BUY Navistar forecasts Class 6 8 retail deliveries for fiscal 2015 in the U.S. and Canada in the range of 350,000 380,000 units, higher than the deliveries of 342,100 units in 2014. Adjusted EBITDA in the first quarter of fiscal 2015 are expected to be in the band of $0 $50 million, excluding pre-existing warranty and one-time items, rebounding from the loss of $110 million recorded in the first quarter of fiscal 2014. In fiscal 2015, the company is also optimistic on military sales based on the recent contract related to the U.S Government s MRAP fleet. Navistar will also benefit from increased production at its heavy truck assembly plant in Escobedo, Mexico, as well as its bus assembly plant in Tulsa, OK. The company is increasing production in order to meet the rising demand for products which ensure fuel efficiency. In Sep 2014, Navistar s joint venture with Chinese truck maker Anhui Jianghuai Automobile Co. Ltd. (JAC) the Anhui Jianghuai Navistar Diesel Engine Co., Ltd. (JND) started manufacturing engines at its new facility in Hefei, China. This facility has production capacity of 200,000 Euro IV and Euro V compliant engines per year. The plant will help in reducing energy consumption by 30% in heating and cooling technologies. Navistar is poised to benefit from cost-saving initiatives like engine restructuring and reductions in discretionary spending and employee headcount. In fiscal 2014, the company recorded $311 million reduction in its structural costs and engineering and product development costs compared with fiscal 2013. In Feb 2014, the company winded down the Huntsville, AL engine plants and consolidated the Equity Research NAV Page 2

mid-range engine production at the Melrose Park engine plant. This will result in savings of over $22 million annually. Further, Navistar plans to shut non-core businesses and focus on identifying opportunities to restructure business and rationalize manufacturing operations in order to optimize cost structure. Navistar also intends to reduce the cost of each 13 liter selective catalytic reduction (SCR) engines by another $1,400 in fiscal 2015. Navistar is benefiting from the launch of new products which boast improved quality and performance, together with its expansion strategies. In fiscal 2014, the company launched many products with SCR technology and also expanded the engine options and heavy-duty truck portfolio. Further, Navistar launched the Cummins ISX and MAxxForce 13L SCR engine in all Class 8 trucks, and SCR 9 and 10 liter engines in the International DuraStar and International Workstar vehicles. The company also offered Cummins ISB 6.7 liter engines in the International DuraStar medium-duty trucks and IC Buses. In addition, Navistar launched the OnCommand Connection which will offer customers better repair and maintenance at lower price. Further, the company is integrating the SCR emissions technology with its proprietary 9- and 10-liter, high horsepower inline six-cylinder (I-6) engines, which will improve fuel efficiency by 8 12%. In Jul 2014, Navistar started shipping the International DuraStar and International WorkStar vehicles powered with such engines, to help provide 8% more fuel efficiency compared to the previous generation. REASONS TO SELL Navistar will be closing its foundry operations at its plant in Indianapolis, IN, where it produces engine blocks and heads for its proprietary engines. After the closure of the plant, Navistar will source the components from its supplier base. The plant is expected to be closed by summer and this changeover will take place during the first half of 2015. Navistar said that the closure of the Indianapolis foundry will reduce workforce by around 180 people. Though operating costs will decline by about $13 million annually, Navistar will incur $40 million additional charges for the accelerated depreciation due to the closure of the foundry and related impacts during the first half of 2015. The company has already incurred charges of $11 million in fourth-quarter 2014 related to employee separation benefits, pension and other post-retirement contractual termination benefits, inventory reserves and related costs. Navistar s results have been adversely affected by lower volumes in Brazil, resulting from economic uncertainty. The revenues from the MWM engine business declined in the fourth quarter due to a drop in demand for engines. Declining military sales also marred financial results in fiscal 2014. Navistar is incurring additional costs due to the ongoing changes in the on-highway emissions standards concerning fuel efficiency, noise and safety. Moreover, conforming to additional environmental requirements will further increase product costs as well as the company s engineering and product development programs. The Environmental Protection Agency (EPA) and the government of Canada have declared the final regulations on greenhouse gas emission and fuel efficiency, which are required to be implemented in model year 2017. This will increase the manufacturing costs of engines and vehicles as well as raise administrative costs. Navistar is also under pressure due to increasing warranty costs. Moreover, if the company fails to comply with the emissions standards according to the EPA, those engines need to extend the warranties. These actions could have an adverse effect on the financial condition, result of operations and cash flows of the company. Navistar operates in a highly competitive market. The intensity of this competition is expected to continue, resulting in price discount and pressurized margins. Better financial resources of competitors act as a competitive disadvantage for Navistar. Moreover, the company sources Equity Research NAV Page 3

materials and manufactured components from third-party suppliers who are often the sole source for a particular item. Consequently, any delay in supply disrupts product delivery, hampering the company s results. RECENT NEWS Navistar Reports Narrower Q4 Loss, Misses Estimates Dec 16, 2014 Navistar reported fourth-quarter fiscal 2014 (ended Oct 31, 2014) adjusted net loss from continuing operations of $38 million or $0.46 per share, significantly narrower than adjusted net loss of $132 million or $1.64 per share in the year-ago quarter. Also, the loss was disappointing considering the Zacks Consensus Estimate of a profit of $0.03. On a reported basis, Navistar recorded a net loss from continuing operations of $72 million or $0.88 per share, significantly narrower than net loss of $153 million or $1.90 per share in the year-ago quarter. Navistar s revenues increased 9.3% year over year to $3.01 billion in the quarter, marginally missing the Zacks Consensus Estimate of $3.03 billion Fiscal 2014 Results Navistar reported adjusted loss from continuing operations of $292 million or $3.55 per share in fiscal 2014, compared to a loss of $527 million or $6.56 per share in fiscal 2013. The loss of $3.59 per share was narrower than the Zacks Consensus Estimate of loss of $6.78. On a reported basis, Navistar reported a loss from continuing operations of $622 million or $7.64 per share in fiscal 2014, compared to a loss of $857 million or $10.66 per share in fiscal 2013. Revenues inched up 0.3% to $10.8 billion from $10.7 billion in fiscal 2013, but remained in line with the Zacks Consensus Estimate. Segment Details Revenues at Navistar s North America Truck segment increased 15.7% year over year to $1.99 billion. The segment recorded a loss from continuing operations of $55 million, considerably narrower than a loss of $355 million in the prior-year quarter. The improvement was driven by higher traditional truck volumes, declining warranty expense and structural costs, together with non-repeat of certain impairment charges. Navistar also announced that it will be closing its foundry operations in Indianapolis, IN. At present, the company produces engine blocks and heads for its proprietary engines at this plant. The company also anticipates operating costs to decline by about $13 million annually. Revenues at Navistar s North America Parts segment decreased 4.4% year over year to $666 million in the quarter. The decrease was due to a decline in military and Blue Diamond Parts sales, partially offset by improvements in commercial markets. The segment registered a decrease in profits to $143 million from $147 million a year ago. Revenues at Navistar s Global Operations segment decreased to $424 million from $427 million a year ago. The segment recorded a loss of $33 million in the quarter compared with $6 million a year ago. The year-over-year decline was primarily due to a drop in South American engine volumes and charges related to right-sizing actions for the Brazilian truck business. Equity Research NAV Page 4

Revenues at Navistar s Financial Services segment increased 9.1% to $60 million from $55 million a year ago. The segment registered a profit of $26 million, up from $17 million in the corresponding quarter last year. The year-over-year upside can be attributed to interest earned on an inter-company loan and an increase in the net financial margin from higher average finance receivable balances during the quarter. Financial Position Navistar had cash and cash equivalents of $497 million as of Oct 31, 2014, down from $755 million as of Oct 31, 2013. Notes payable and long-term debt stood at $5.2 billion as of Oct 31, 2014, up from $5.1 billion as of Oct 31, 2013. Net cash used in operations totaled $336 million in fiscal 2014 versus cash flow of $100 million a year ago. Capital expenditure was $88 million in the period, down from $167 million in the year-ago period. Guidance Navistar forecasts Class 6 8 retail deliveries for fiscal 2015 in the U.S. and Canada in the range of 350,000 380,000 units. Cash and cash equivalents, along with marketable securities, are expected between $700 million and $800 million by the end of first-quarter fiscal 2015. Adjusted EBITDA in the first quarter of fiscal 2015 are expected to be in the band of $0 $50 million, excluding pre-existing warranty and one-time items. Equity Research NAV Page 5

VALUATION Currently, shares of Navistar are trading at 52.1x our 2015 EPS estimate of $0.54. Over the last five years, shares of Navistar have traded in a range of 7.0x to 377.2x trailing 12-month earnings. The stock is trading at a premium to the peer group, based on forward earnings estimate for 2015. The current, which is closer to the lower end of the historical range, is at a 254.4% premium to the peer group for 2015. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the overall market. Our target price of $30.00, which is 55.6x our 2015 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Navistar International Corp. (NAV) 52.1 8.2 15.0 N/A N/A 377.2 7.0 Industry Average 14.7 20.5 13.3 10.5 17.1 122.8 12.4 S&P 500 16.3 15.2 10.7 15.0 18.8 19.4 12.0 Delphi Automotive PLC (DLPH) 13.1 11.3 14.3 11.6 14.8 15.2 6.8 TRW Automotive Holdings Corp. (TRW) 12.4 11.6 7.5 9.2 13.3 26.3 4.4 Autoliv Inc. (ALV) 17.4 15.3 9.2 12.6 18.7 48.0 7.0 Tenneco Inc. (TEN) 11.2 9.8 12.9 7.7 11.9 112.0 8.8 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Navistar International Corp. (NAV) 151.6 157.1 3.1 66.7-0.8 0.0 37.5 Industry Average 2.5 2.5 2.5 19.9 0.9 0.7 10.5 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research NAV Page 6

Earnings Surprise and Estimate Revision History Equity Research NAV Page 7

DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of NAV. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform - 15.5%, Neutral - 76.9%, Underperform 6.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Copy Editor Content Ed. Lead Analyst QCA Reason for Update Kamalika Sinha Oindrila Ghoshal Dutta Sweta Goenka Sweta Goenka Anindya Barman Earnings Equity Research NAV Page 8