Using Veritas to Construct the "Per…

29-04-2017 Hits:94619 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:85530 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:85906 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:90004 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:88440 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:88181 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:59319 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:87774 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:87313 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:87661 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:94070 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:91355 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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This is the first foresnic analysis of the next step of my investment thesis. We have analyzed and tracked the real property bust, the real property financing bust, the real property financing insurance bust, and now we shall trace the effects of all of those busts on mainstream corporate America and Main Street, USA. The banks are no longer loaning to each other, and are not loaning in any significant volume to businesses. This is bad news for businesses that need money, particuarly capital intensive businesses, businesses in tough operating environments, mismanaged businesses, and most of all - businesses ensconced in all three of the aforementioned buckets. Basically, as Wall Street and commercial banks horde capital from capital needy corporate America and Joe (and Jody) citizen, insolvencies quickly follow. After all, investment and lending is the lifeblood of capitalism.  

In order to keep the posts shorter, I will separate the overview of this portion of my thesis from the initial analysis, then post a more rigorous supporting document on the effects of the credit crunch, followed by a Doo Doo list of companies affected by such. Below is the first company that I have decided to release t o the public domain as part 3 of the investment thesis. It is Navistar and it currently sports NEGATIVE SHAREHOLDER EQUITY in a very negative operating environment in a very negative macro situation. This HTML blog post does not have the full pro formas, but registered users may access the content by downloading the full report here:  pdf  Navistar Consolidated report (326.7 kB 2008-08-21 17:28:53)


Reggie Middleton's Forensic Analysis of the Navistar Corporation

image001.pngSlowing global economic pace, high gasoline prices and rising inflation have dented the demand in the global automotive sector. The problem has been compounded by tightening lending and leasing standards, dramatically reduced residual values and rising fears of a US recession. This has resulted in automobile sales in the US tumbling to a 16-year low in July 2008 following nine months of consecutive decline. The truck and SUVs segment sales have been impacted the most, as customers shift towards smaller fuel-efficient vehicles. The trend is expected to continue through 2009 amid worsening macro-economic environment and slowing business activities, forcing contractors and builders to postpone their capex plans and purchase of commercial trucks. However, we expect 2009 commercial truck sales to pick up over the 2008 levels due to strategic purchases ahead of 2010 emission requirement revisions, with a resultant decline in sales in 2010 due to the macro environment.

Navistar, with a nearly 29% market share in the US and the Canadian commercial truck market, is likely to experience a challenging operating environment ahead due to demand slowdown in the US truck market and lower engine sales off production roll back by Ford and other OEMs. Besides softening demand, higher commodity price for steel and aluminium is likely to dent margins for Navistar. Declining sales volumes growth, expected compression in margins and likely higher interest cost for Navistar on its huge debt liability (which stood at $6.9 billion and represented 59.3% of its total assets as of April 30, 2008) is likely to weigh on Navistar’s near-to-medium earnings, in our view. Further, the Company’s negative shareholders’ equity (of $0.6 bn as of April 30, 2008) owing to large accumulated losses of $2.4 bn could affect its ability to refinance its debt on favorable term in future. Based on relative valuation and discounted cash flow (DCF) approaches, we believe that Navistar should be currently trading at $43.7, which makes the stock overvalued by 23.6% at its current price of $57.2 (as of August 13, 2008).




Record high gasoline prices to slowdown demand for trucks. As a result of a nearly 78.5% increase in crude oil prices since January 2008, global demand for automobiles, particularly trucks and SUVs, have been plummeting. The industry shipments in the US and Canada have witnessed a significant decline of 26% and 48% in 1Q2008 and 2Q2008, respectively, on top of 30% decline in 2007. With oil prices expected to remain at elevated levels at above $100 per barrel in the near-to-medium term, we expect the demand for trucks to continue to witness the subdued trend.

Economic slowdown in the US to further dampen sales. Economic slowdown caused by US housing markets downturn, distress in the financial markets, spiralling inflation and rising interest rates are further compounding the problems caused by high crude oil prices. Weak freight demand due to economic slowdown and higher financing cost owing to tight lending standards by banks and financial institutions is deferring truck shipments in the US. With economic slowdown likely to continue till the second half of 2008 and extending till 2009, we expect Navistar’s commercial truck sales to remain under pressure.


Margin headwinds continue to challenge Navistar in the near-to-medium term. Rising input cost off increase in steel and aluminum prices combined with lower elasticity on the pricing front owing to intense competition is dampening margin outlook for the auto manufacturers. Costs of major components have spiraled over the last few quarters owing to increase in steel and aluminum prices, which have increased nearly 100% and 22%, respectively, since January this year. Also, due to a significant time lag between cost increase and increase in price, companies including Navistar have witnessed compression in their gross margins. The trend is expected to continue in 2009 and 2010 due to an expected rise in cost of raw materials and additional costs relating to compliance with 2010 Environmental Protection Agency (EPA) emission norms. We expect Navistar’s gross margins to decline to 18.1% and 17.7% in 2009 and 2010, respectively, from an estimated 18.2% in 2008.


Production rollback by Ford and other OEMs to hamper engine and component revenues. In response to subdued demand, most of the large manufacturers including GM, Ford and Toyota have announced production cuts and production realignment in favor of small fuel-efficient cars. Ford, which accounts for nearly 58% and 14% of the Navistar’s engine units shipments and total revenues, respectively, declared a 15-20% production cut, in May 2008, for 3Q2008. Navistar could stand to lose a sizeable portion of its revenues and face the brunt of lower margins amid further downward revision of production plans by Ford and other OEMs.


Navistar continue to bear high interest cost off significant debt obligation. Navistar has a substantial debt liability of $6.9 bn, representing nearly 59.3% of its total assets. The Company’s interest expense has increased consistently from $308 mn in 2005 to $431 mn in 2006 and $502 mn in 2007, with interest coverage ratio of 0.85x in 2007. Amid tightening credit market conditions and rising interest rate scenario, Navistar’s large debt liability could pose a considerable pressure on its earnings in the future periods, in our view.


Negative shareholders’ equity.  On top of huge debt liabilities, Navistar had negative shareholders’ equity of $0.6 bn (as of April 30, 2008) as a result of accumulated losses of $2.4 bn. Although Navistar’s shareholders’ deficit has improved from $1.7 bn in 1Q2006 to $0.6 bn in 2Q2008, we expect the company’s shareholders’ equity to remain in negative territory until 3Q2010, hindering the company’s ability to refinance its debt on favorable terms.


Increased stress on finance receivables. A decline in prices of used vehicles off higher gasoline prices and increased economic distress has led to a recent increase in delinquencies on auto loans. Navistar’s annualized provision for loss on finance receivables stood at a mere 0.4% of its total receivables in 2Q2008, while its charge-offs were higher at 1.4%. Its recent increase in number of vehicles repossessions and the consequent losses will require the Company to step up its provision in future. We expect Navistar to increase its provision for losses on finance receivables from 0.40% of total receivables in 2Q2008 to 2.0% at the end of 2009.


III.         Valuation

We have valued Navistar at $43.7 per share, implying a downside risk of 23.6% from its current share price of $57.2 (as of August 13, 2008), based on weighted average price through relative valuation and DCF valuation approaches (assuming weights of 60% and 40%, respectively, for the two methods)


Market Cap ($ mn)

Price/ Revenue per share (x)

 P/E (x)




































































Industry Average












 Source Thomson One Analytics


Valuation summary

Target price





P/ E approach



EV / EBITDA approach



Relative Valuation






DCF based valuation






Weighted average share price






Current share price






Upside (dowside) potential








Relative valuation

Based on the relative valuation approach, we have valued Navistar at $43.1 per share on the basis of PE and EV/EBITDA based valuation approaches with respective weights of 40% and 60%. We have assigned higher weight for the EV/EBITDA valuation owing to different capital structure of companies in Navistar’s peer group.


P/E based valuation

Based on P/E based approach Navistar has been valued at $30.9 per share on the basis of the 2010 EPS of $2.82 per share and 2010 P/E of 10.9x (based on peer group’s 2010 P/E of 8.6x and a premium of 28%).

Relative P/E Valuation




Diluted EPS


2010 P/E (x)
(Ind P/E  excl NAV+  premium)


Target price




EV/EBITDA based valuation

Following EV/EBITDA based approach we have valued Navistar at $51.2 per share based on 2010 EBITDA of $969 mn and 2010 EV/EBITDA of 8.9x (based on peer group’s 2010 EV/EBITDA multiple of 6.7x and a premium of 33%)




All figures in $ mn except per share data





2010 EV/ EBITDA (x)
(Ind EV/EBITDA excl NAV +  premium)




Net Debt


Maket Cap


Shares outstanding


Target price




When compared with its peer group the Company has historically traded at a premium of 38% and 43% on P/E and EV/EBITDA multiples. We do not expect the Company to command the same level of premium in future and have reduced our premium assumptions to 28% and 33% for the respective multiples.   


DCF valuation

Our DCF valuation suggests $44.6 per share valuation of Navistar, with a downside risk of 22% from its current share.

Precent value of the series of free cash flow ($ mn)






Terminal Value

Free Cash Flow:




















Provision for doubtful debts














Changes in WC



























Discounting factor (x)



















(All figures in $ mn except per share data)


Total NPV of the FCF (EV)


Less: Net Debt


Market Cap



No. of shares



Value per share



IV.        Investment Highlights

Plunging truck demand in the US to impact Navistar’s revenues over the near-to-medium term


High oil prices to continue to dampen truck and SUVs sales. A slump in the US auto industry, witnessed by a slow down in truck and passenger car sales volumes, is likely to persist through 2009 off high level of gasoline prices. The truck segment has felt a sharper impact with volumes declining 23.0% and 20.0% in June 2008 and YTD 2008 (June ending), respectively, against 7.5% and 4.2% declines for the US passenger car volumes for the period. This has been followed by US automobile sales slumping to a 16-year low in July 2008, after nine months of a consecutive decline, the longest downturn period since 2001 recession. Continuing higher levels of crude oil prices (which rose from $83 per barrel on an average during the second half of 2007 to $111 per barrel in the first six months of 2008) has had a dampening impact on automobiles volumes including the truck sales. Although oil prices have recently cooled off after touching a high of $147.3 per barrel in July 2008, a level above $100 per barrel would continue to weigh on the automobile sector volumes, in our view. Prices were $63 per barrel in 7/07


Navistar shipments and crude oil prices




According to Wards Communications, a premier online journal of the global auto industry, industry shipments for school bus, and class 6, class 7 and class 8 trucks in the US and Canada declined 38.4% to 118,300 units in 1H2008 compared with 192,000 units in 1H2007. The total automobile industry shipments have witnessed a continuous fall since 2007, and clocked a 30% decline to 319,000 units down from 454,700 units in 2006. Navistar, which witnessed a 40% decline in its US and Canada shipments in 2007, continued to have subdued volumes in 1H2008, with its shipment declining 26.3% over 1H2007. This trend is likely to continue till a noticeable drop in gasoline prices to at least the mid-2007 levels is reached.


Weakening economic fundamentals fueled the declining sales trend. Worsening macro-economic conditions, tightening credit environment and collapsing housing market are likely to hurt auto sales in the coming months. Building and housing contractors have been postponing their capex plans and delaying their purchase of trucks and pick-ups amid uncertain housing market. Retail sales and consumer expenditure have also been quickly declining over the past few months. The slow-down in business activities has shown no sign of reversal, and the outlook for the US economy is continuing to worsen. In a recent survey of 50 economists by Bloomberg, the US economy is expected to grow at an average 0.7% from July through December, half the gain in the first six months of 2008. A survey of 500 economists by Blue Chip Economic Indicators, which recently surveyed America's leading business economists, also came up with a median expected GDP of 1.6% and 1.5% for 2008 and 2009, respectively, compared with growth of 2.2% in 2007. Take this information in light of the historically and consistent overly optimistic outlook of economist consensus forecasts.

Industry truck shipments (US and Canada) and GDP growth rate (US) Industry truck shipments (US and Canada) and GDP growth rate (US)



We expect Navistar’s truck shipments in 2008 to be nearly 14% lower than those of 2007 as macro conditions in the US continue to show an unfavorable trend. The volumes for the Company’s engine and components are also expected to slow down, off a recent production cut and plant closure by its OEMs customers including Ford.


Higher financing cost dampened appetite for auto demand.  Higher cost of financing and lack of credit availability is further compounding the problems caused by higher gasoline prices for auto manufacturers. With banks tightening their lending standards and being more selective in their lending, sale of automobiles have plunged in recent periods. In addition, recent announcements by Chrysler, GM and Ford to scale back or even eliminate their lease businesses underscore the magnitude of credit crunch in the auto sector. The era of low interest financing on auto purchase seem to have been over, with financial institutions and banks getting more cautious in their lending post huge subprime and credit card losses and rapidly declining auto values leaving many auto leases and loans underwater.




Higher input costs to squeeze margins. The competitive pressure in the global automobile industry has compelled OEMs to absorb a sizeable portion of component cost increase over the last few quarters. This coupled with slowing volumes has significantly squeezed margins of OEM companies including Navistar.

Navistar gets its operating margins squeezed! 




Since the beginning of 2008 prices for all major inputs, including steel, aluminum, platinum, copper and crude oil, have witnessed an increase of 100%, 22%, 32%, 23% and 40%, respectively. Although Navistar is fighting cost pressures through a combination of design changes, material substitutions and global sourcing efforts, the ongoing consolidation in the steel industry, with Mittal Steel taking over Arcelor and Tata Steel taking over Corus, is likely to maintain costs at elevated levels. Besides this, with the time lag between cost increase and price increase spanning across several months or even a few quarters owing to intense competition, Navistar’s near-to-medium margins are expected to remain under pressure. The problem is likely to be aggravated by implementation of 2010 emission standards, which require auto OEM companies to meet stringent pollution norms, driving up their cost of manufacture and adversely affecting their margins. This, in our opinion, is likely to compress Navistar’s gross margin to 18.1% and 17.7% in 2009 and 2010, respectively, from the estimated 18.2% in 2008. These levels would be much lower than average gross margins of 19.3% and 19.9% witnessed by the US auto industry in 2006 and 2007, respectively.


Production cuts by auto manufacturers to affect demand for engines. Citing soaring gas prices and consumers shift away from large trucks and SUVs, large truck manufacturers in the US have announced production cuts and product realignment in favor of fuel-efficient small cars, which have witnessed lower decline in volumes. In May 2008, Ford Motors announced a 15-20% and 8% production cut for 3Q2008 and 4Q2008, respectively. In July 2008, GM motors announced lowering of its planned production by 117,000 vehicles for the remainder of 2008 while Toyota Motors reduced its 2009 production forecast by 350,000 units. All major auto manufacturers have witnessed a significant decline in sales, predominantly in their truck segments. In July 2008, GM and Ford reported a 40.4% and 22.1% y-o-y decline in their truck sales, respectively, as high gasoline prices and weaker economy continued to impact truck sales.

  Navistar Engine Unit Sales



As a result of a decline in truck sales, Navistar’s engine sales to OEMs, including Ford which accounted for 58% sale of its total engine unit shipment in 2007, is expected to decline. In 2007, Navistar’s engine unit sales declined 22.1% to 404,700. In view of continued downward pressure on demand for truck engines by other manufacturers, in August 2008 Navistar lowered its 2008 guidance to nearly 345,000 units in 2008, down from the previous guidance of 362,500 units (May 2008). This represents a decline of nearly 14.8% in 2008 on top of a 22.1% decline witnessed during 2007.


Navistar’s balance sheet continues to reel with high debt and negative shareholder’s equity

At the end of 2Q2008, Navistar’s balance sheet showed a large debt liability of $6.9 billion, representing approximately 59.3% of its total assets. This is much higher than an average 38.2% for its nearest competitors (Paccar, Cummins, Caterpillar and Oshkosh) on the same date. Navistar’s high leverage combined with difficult operating environment could weigh on the Company’s future earnings, particularly in wake of a possible decline in its volumes and margins. The Company also appears to score low among its competitors in terms of interest coverage ratio, which stood at 0.71x versus an average of 13.8x for its competitors for 2007. Also, the fact that the Company has large accumulated losses (represented by negative shareholder’s equity of $0.6 bn) could make it difficult for Navistar to raise additional debt at favorable terms if credit conditions continue to show signs of worsening.


Expansion plans by Navistar to partially mitigate industry slowdown

Navistar is embarking on a strategy to expand its product portfolio and global presence through joint ventures to mitigate the impact of a slowdown in the US markets. The Company has a significant presence in Canada, Mexico and Brazil, and derived nearly 31% of its revenues from outside US in 2007. In August 2008, Navistar and American LaFrance formed a joint venture to manufacture vocational trucks for domestic and global markets. Navistar also formed an alliance with Caterpillar to manufacture medium and heavy duty commercial trucks outside North America. To exploit opportunities in growing economies like India, Navistar has formed a joint venture with Mahindra and Mahindra to produce diesel engines for commercial trucks and buses in India. The downside to this is that we see the entire global economy following the US into an economic slump, which may curtail the positive results of NAV’s efforts just as they have invested resources into getting them off the ground.


Shipments in traditonal and expansion markets





Besides entering joint ventures, the Company is expanding its product portfolio and increasing its customer base. Navistar has ventured into military business, and expects to generate nearly $3 bn and $2 bn of revenue contribution from military business in 2008 and 2009, respectively. In June 2008, Navistar was awarded five contracts worth nearly $707 mn.


Navistar’s strategy to establish its presence in export markets, coupled with its sustainable military business would help the Company offset the impact of business cyclical downturns to some extent, in our opinion.


2010 Emission norms to result in pre-sales in 2009

Following an ongoing global drive to reduce global warming through stringent emission standards, US heavy-duty truck manufacturers will have to move towards EPA 2010 compliant engines. As truck buyers switch to EPA compliant engines starting 2010, we expect presales to result in 2009 ahead of implementation of 2010 emissions norms due to expected rise in truck price complying with the new norms. It is worthwhile to note that the last emissions drive implemented during 2007 witnessed robust class 8 truck sales in 2006 ahead of 2007, followed by a slowdown in 2007 sales. We expect a similar trend in 2009 as US companies will pre-pone their capex plans in a bid to acquire cheaper trucks before implementation of the new norms in 2010. As a result, we expect Navistar’s 2009 sales to increase 15% over the estimated 2008 levels before witnessing a decline of 4% in 2010. Overall, we expect industry order receipts to increase 19% in 2009 followed by a 6% decline in 2010 with Navistar’s truck shipments expected to increase 21% in 2009 followed by 11% decline in 2010. 

2009 pre-sales to impact 2010 sales 




High customer concentration, with Ford accounting for nearly 14% of the Company’s total revenues

In 2007, Navistar derived a significant 14% of its total revenues from supply of diesel engines to Ford. Following Ford’s decision in May 2008, to decelerate production of pickup vehicles, Navistar lowered its engine production and initiated temporary layoff at its Indianapolis facility in Indiana. A further cut by Ford in its production plan could seriously impact Navistar’s revenue from engine sales and dent its overall gross margins. This coupled with a possibility of a relationship between the two automakers getting more strained owing to an ongoing litigation over damages relating to engine supply, could risk the long alliance and hamper engine sales to Ford.


Higher expected losses on financial receivables

Navistar has nearly $5.5 bn of finance receivables on its balance sheet, comprising nearly 44% of its total assets. As of 2Q2008, Navistar’s total allowances for loss reserves stood at 1.7% of its receivables. However, in 2Q2008 Navistar’s annualized charge-off was 1.4% while annualized provisions created during the quarter stood at a mere 0.4% of the total receivables. As a result of a steep rise in gasoline prices, prices for used vehicles have decreased dramatically resulting in higher delinquencies on auto loans. In 1H2008 Navistar’s charge-offs increased more than three-fold to $36 mn from $10 mn in 1H2007. Navistar repossessed 62 vehicles in 1H2008 with $16 mn of losses, compared with 23 vehicles repossessed with a loss of $7 mn in 1H2007. With deteriorating macro economic conditions and declining prices for used vehicles in response to higher gasoline prices, auto loans delinquencies are expected to increase and result in increased provisions for Navistar in the coming quarters.


  Increase in provisions due to rising delinquencies on auto loans


  See the downloadable PDF document for full pro formas and financials -  pdf  Navistar Consolidated report (326.7 kB 2008-08-21 17:28:53)