Just as Ford (F) started to make some headway in its extensive rebuilding program, the Dearborn automaker incurred a noteworthy legal headache from an important engine supplier. Illinois-based holding company Navistar (NAVZ.PK) filed a $2 billion suit against Ford alleging breach of contract by the automaker for trying to develop its own diesel engine despite an agreement to buy Navistar's Power Stroke powertrain through 2012. Navistar's claim comes in response to Ford's January lawsuit contending that Navistar hadn't paid warranty costs.
The latest Power Stroke engine delivers 6.4 L displacement and up to 350 horsepower in Ford's popular Super Duty F-Series pickup truck, a clean and efficient vehicle with U.S. sales of nearly 1.4 million units since 2001. In fact, Ford sells more diesel-powered pickup trucks per year than DaimlerChrysler's (DCX) Dodge and GM's (GM) Chevrolet combined. Navistar and Ford have collaborated on Super Duty trucks since 1982 and the ongoing lawsuit complicates an important partnership on the domestic automotive front.
Should we worry about any long-term negative implications for Ford and Navistar? For now, keep a watchful eye on the situation. The two companies have some time to settle their differences before the assigned trial date of June 26, 2008, and both of them will think twice before allowing a contractual dispute to dissolve a lucrative partnership. But if the suit goes on too long, look for the corporate bond that binds them to weaken and for both companies' stocks to take a short-term hit. Ford could lose the engine that powers its popular pickup trucks and, even if Navistar wins, the engine-maker could still lose billions of dollars in sales, assuming Ford would've requested millions of engines over the next few years at about twice the price of a rebuilt 1997 Ford F-450 engine.
In the bigger picture, the lawsuit also distracts Ford from focusing on the difficult task of recovering from a $12.7 billion loss in 2006. While first quarter losses in 2007 dropped dramatically in magnitude compared to first quarter losses in 2006, the domestic automaker has some serious work to do before it fully restores its former luster.
Disclosure: I do own a mutual fund that may contain one or more of the stocks mentioned in this post. However, any interest that I may own is subject to the discretion of my mutual fund manager.