It looks like truck and engine manufacturer Navistar (NYSE:NAV) has finally bowed to the inevitable and is changing up its engine technology. While the company's press release reads as though this is a big leap forward, the reality is that management has struggled mightily with its existing advanced exhaust gas recirculation (EGR) technology and had little choice but to abandon an all-EGR approach in favor of urea-based after treatment. Although this switch is a necessary step for the company, it remains to be seen how much implementing this new approach (and getting EPA certification) is going to cost.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Out with the New, in with the Old?
Navistar didn't exactly hand out detailed technical specs, and I'm not an engineer, but it looks like the company is going to try to preserve some of its prior proprietary technology and combine it with aspects of the selective catalytic reduction (SCR) technology used by others like Cummins (NYSE:CMI), PACCAR (Nasdaq:PCAR), Daimler and Volvo (OTC:VOLVY). In doing so, the company hopes to be able to finally achieve EPA certification and avoid sizable fines and/or outright bans on engine sales for non-compliance.
At the most basic level, Navistar's new "In-Cylinder Technology Plus" is going to use urea to reduce nitrogen oxide emissions. Assuming that the EPA goes along with it (and the EPA has thus far been surprisingly accommodating to Navistar), new engines could be on the market early next year.
SEE: 9 Cars That Can Rebuild The American Auto Industry
A Worthwhile Effort, but a Risky Move
In using what sounds like a hybrid of EGR and SCR technologies, Navistar is going down a similar road as John Deere (NYSE:DE), as this large manufacturer of agricultural and construction equipment builds engines with emissions control systems that integrate features of both technologies.
While the pure EGR approach clearly did not work for Navistar, it is not as though this was a completely radical or unique idea. As mentioned, Deere uses aspects of EGR technology, as have Caterpillar (NYSE:CAT) and Cummins. Where Navistar arguably went wrong was in placing so much emphasis on making its Advanced EGR (A-EGR) technology work at the cost of having SCR options available while they worked out the kinks in EGR and got EPA approval.
As it turns out, this "no SCR" orthodoxy on the part of Navistar carried a very high price; warranty costs have been much higher than expected and the company has lost credibility with customers and investors. There's also still the matter of the final bill to the EPA, to say nothing of the costs of bringing the new technology to market.
SEE: Green Energy: Why We're Still Not Using It
Go with the Risky Rebound or the More Expensive Leader?
As I have mentioned, the costs for introducing this new engine technology, let alone its chance of getting EPA approval and market acceptance, are significant unknowns. What's more, it is not clear yet as to whether Navistar will need to buy components externally (most likely from Cummins) to make this new approach work. For that matter, Navistar may still find itself in a similar predicament next year and may ultimately be forced to go back to Cummins as an engine supplier.
With all of those unknowns, it's no surprise that these shares trade at a fraction of per-share revenue while Cummins trades at around one times sales. Although Cummins is certainly exposed to the risk that North American heavy vehicle demand slows and that demand in Europe, China and Brazil doesn't recover quickly, nobody seems to doubt the quality of Cummins' leadership, technology or products.
In contrast, the quality of Navistar's leadership is very much open to debate, and much-celebrated growth opportunities like its venture with Clean Energy (Nasdaq:CLNE) won't materially impact the bottom line for a while (if ever).
SEE: 4 Ways Rising Fuel Costs Influence The Auto Industry
The Bottom Line
So, investors have a familiar choice here. Go with the troubled turnaround candidate (Navistar) and the prospects of significant market-beating appreciation potential if the company can get itself back on track, or take the surer bet with its lower appreciation potential.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.