Navistar Suspends Production of Ford Engines

Navistar announced today that it has suspended production of Ford PowerStroke diesel engines due to the companies’ ongoing contract dispute.

“Ford and Navistar are tied at the hip for diesel engines for the F-250 and F-350 (which also happens to be one of Ford’s few major launches this year),” Bear Stearns said in a release. “This was one reason why we thought that ‘mutual fear would bring peace’ and that a disruption wouldn’t occur. While we don’t currently expect an extended outage, 30-plus days would be material to both Navistar and Ford.

“We estimate about 75% of Navistar engines are sold to Ford, and 70% of Ford SuperDuty trucks have NAVISTAR diesels (single sources). In our view, it’s impossible to quickly swap out the engine and put another manufacturer's diesel in place, and that a gas engine is an unsatisfactory option for certain applications.

“We estimate Ford sells 330,000 trucks with PowerStroke engines, or 33% of all F-Series trucks. An assumed selling price of $35,000 would imply lost annualized revenue of $11.6 billion (9% of 2007E Automotive revenue). Further assuming a decremental margin of about 8% (considering less overhead absorption) would imply annualized lost operating income of $928 million, or about $0.40 (vs. our 2007E forecasted loss for Ford of $2.80). We believe there was little pre-buying of pick-ups ahead of the ‘07 diesel emissions deadline. According to Autodata, Ford had 96 days’ inventory of F-Series vehicles at Jan. 31. However, based on our channel checks, we believe that this was more skewed toward F-150s.

“We estimate that Navistar’s external engine revenue is $2.7 billion prior to the MWM purchase (20% of consolidated revenue), with the majority representing PowerStroke engines, for annualized lost operating income of $215 million, or $2.15 for Navistar (vs. our F2007 estimate of $2.00) at an 8% decremental margin.”

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