Cummins Should Benefit As Production Schedules Normalize, But The Cycle Is A Big Unknown Now

 

A recent surge in truck orders has done wonders for heavy machinery companies exposed to that sector, with the shares of Allison (ALSN), Cummins (NYSE:CMI), and PACCAR (PCAR) up about 15% to 25% since late September as September Class 8 truck orders set an all-time record and October orders came in strong as well. At the same time, component availability is improving, breaking up production logjams, cost inflation is flattening out, and pricing actions are contributing more significantly.

What happens next is the big question. I’ve been expecting Cummins to do well into the first half of 2023, but I’m concerned that higher interest rates, weaker economic conditions, and a worsening freight market will drive weaker demand. I like the long-term outlook for Cummins, particularly after the Meritor deal and with the company’s growing exposure to decarbonization, but I don’t see such a compelling prospective return relative to the cyclical risk.

 

Read more here: 

 Cummins Should Benefit As Production Schedules Normalize, But The Cycle Is A Big Unknown Now

Cummins' Bid For Meritor Underlines The Value Of Quality ICE/EV Component Portfolios

 

In a challenging market for auto and truck suppliers, Meritor (MTOR) had been doing okay since my last update, up slightly and keeping pace with Allison (ALSN) while outperforming American Axle (AXL), Cummins (CMI), Dana (DAN), and Tenneco (TEN), and the S&P 500. That performance trajectory spiked yesterday (February 22), with the announcement that the company had accepted a buyout bid from Cummins.

I like this deal for both parties, though arguably more for Cummins than Meritor. Cummins is paying a premium both to the current price and my own estimate of Meritor's fair value, and the Cummins acquisition gives shareholders cash upfront in exchange for the risks of how the EV market will develop in commercial trucks and how the heavy vehicle cycle will play out over the next years. For Cummins, I like this deal as a way of further integrating both its legacy powertrain operations and expanding its long-term leverage to vehicle electrification.

Read the full article at Seeking Alpha: 

Cummins' Bid For Meritor Underlines The Value Of Quality ICE/EV Component Portfolios

Cummins Stock Looking More Tempting, But Cycle Risk Remains A Concern

 

Cummins (CMI) is a proven high-quality operator, with strong market shares across its key markets, strong return metrics (ROA, et al), and a good reputation on Wall Street. Still, the cyclicality of the business and the often high valuation Wall Street has been willing to give the shares have meant that it hasn’t always been the highest-quality stock – the long-term returns compare well to the S&P 500 and other industrials, but there have definitely been stretches of underperformance.

This is an interesting point in Cummins’ life cycle. Not only is there an unusual truck cycle still left to play out, with component shortages pushing Class 8 volumes into 2022, with a likely cyclical decline in 2023, but Cummins has the unenviable task of maintaining leadership in its core legacy markets while positioning and transitioning to new technologies and markets like hydrogen and electrification.

I like Cummins, and I see decent long-term return potential in the stock today, but timing cycles and cyclical stocks is never straightforward. The market almost always anticipates the turn (selling off while current conditions are good, buying while current conditions are still poor), but it’s possible there’s more risk/room on the downside, as the peak-to-now decline is only about half that of peak-to-trough moves in prior cycles.

 

Read more here: 

Cummins Stock Looking More Tempting, But Cycle Risk Remains A Concern

Cummins: New Engine Opportunities And Clean Energy Can Patch Over Cyclical Risk

When I last wrote on Cummins (CMI) I said that I saw decent long-term appreciation potential, but that I was concerned that the truck cycle and industrials in general had overshot some. In the intervening months the industrial space had another “here, hold my beer” run and these shares are up another 20% or so – in line with industrials in general, and better than PACCAR (PCAR), but well short of agriculture and construction-leveraged names like Caterpillar (CAT), CNH (CNHI), and Deere (DE).

A potentially peaking North American truck market is definitely a concern, but I believe recent outsourcing wins give investors some positive drivers to look forward to in a few years. I likewise believe Cummins’s strong leverage to green hydrogen is a powerful sentiment offset to any cyclical risk, though what momentum investors giveth, they will eventually taketh away.

As is, I still like Cummins about as much as I like other high-quality industrials like Dover (DOV), Parker-Hannifin (PH), or Rockwell (ROK), though I am sympathetic to the argument that Cummins’s greater cyclicality should come with some “bonus” in terms of expected return.

 

Read more here: 

Cummins: New Engine Opportunities And Clean Energy Can Patch Over Cyclical Risk

Cummins: Sentiment Showing Even Wilder Swings Than The Business

Cummins (CMI) is a cyclical business, always has been and likely always will be, and yet, you still see analysts and investors who treat every cyclical peak and cyclical trough like the new normal. Sentiment has shifted significantly in the last few months, with the stock dropping close to 40% during the March panic but then shooting back up on what I believe may be premature enthusiasm that the worst of the downturn is now understood and “in the numbers”.

Make no mistake, I think Cummins is a great company, and I think management made smart choices to prepare for this downturn. I also think that while the company has been slow to invest in powertrain electrification technologies (particularly axle-centric technologies), it has made it up for that somewhat with other investments. My bigger issue is sentiment. Cummins would seem to offer a decent return now, but I think there could be another pullback after this strong rally, and that’s where I’d look to get more aggressive.

Read the full article here:
Cummins: Sentiment Showing Even Wilder Swings Than The Business

Cummins Priced For A Recovery But Only Starting Its Downturn

The next year is looking like a perfect storm for Cummins (CMI), with almost every major market the company serves poised to get worse (heavy duty trucks in Brazil is the one real exception). And yet, with the shares up about 10% since my last update and only the first down quarter in the cycle in the books, investors seem to already be looking well ahead to the recovery that will inevitably come.

Make no mistake, Cummins is one of the best-run heavy machinery companies out there, and I like the company’s share growth and market/product expansion opportunities. Still, I’ve seen too many cycles to shrug and assume “this cycle will be different”. Give me a 10% to 15% pullback, though, and I get a lot more positive on the long-term benefits of owning these shares.

Read more here:
Cummins Priced For A Recovery But Only Starting Its Downturn

Cummins Well-Positioned For The Correction

Cummins (CMI) is enjoying the last few quarters of this heavy-duty truck-driven cyclical peak, but management is already preparing for a downturn in 2020 that will almost certainly lead to one year (maybe two) of negative comps in revenue, EBITDA, and free cash flow. Ex-North America demand and other businesses like Power could help soften the blow, but cyclicality is just part of the story and something that long-term investors need to accept.

I think valuation on Cummins is pretty reasonable today, and I don’t see it as particularly over-valued or under-valued. Certainly there is a risk that end-market demand will correct to a “weaker for longer” cycle than currently expected, but my bigger concern is just how markets tend to treat cyclical stocks; Wall Street is obsessed with growth and Cummins shares may well lag when the reality of the cycle starts showing up in the numbers, even though everybody knows it’s a cyclical company that goes through its ups and downs and still manages to generate strong cash flows and ROICs across the cycle.

Continue here:
Cummins Well-Positioned For The Correction

Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

This is harvest time for Commercial Vehicle (CVGI), as this supplier of seats, wiring harnesses, and other components to the global truck, construction, ag, and mining equipment market is seeing robust demand as companies like Daimler (OTCPK:DMLRY), Volvo (OTCPK:VOLVY), and PACCAR (PCAR) deliver on record Class 8 truck backlogs and healthy medium-duty truck backlogs as well. While Commercial Vehicle is weathering some higher manufacturing costs (wage-driven, primarily), the company is doing a good job of managing costs and maximizing margins.

The “what next” question is very relevant to this stock. I expect a double-digit decrease in sales next year, as plunging Class 8 orders will quickly deplete that backlog, and recent wins outside of trucking and in geographies like China won’t offset it. I’d love to see CVGI put some of its liquidity to work – while management has long talked of wanting to acquire complementary assets, they haven’t done much, and I think acquiring some electrification assets could be money well spent. I do still believe these shares are undervalued, but they’re unfollowed and the shares could languish on a steeper/longer trough in the core truck market.

Continue here:
Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

It’s not exactly news that the market has turned its back on the auto/commercial vehicle parts sector. Allison (ALSN) is a rather glorious exception, with the shares up about 13% over the past year, and Cummins (CMI) has done better than many (down about 13%), but Commercial Vehicle Group’s (CVGI) roughly 30% decline over the past year has been pretty close to the norm for the sector, as investors worry about the near-term impact of higher input costs and the looming cliff in large truck orders and production rates.

Although I do believe that the market is discounting the future cyclicality of CVGI’s revenue and profits too harshly, it’s tough to argue with the tape and the lack of institutional coverage for this name certainly doesn’t help. I do believe the shares are significantly undervalued, but investor sentiment will likely need to improve first for autos and CVGI still needs to prove that it can maintain margin leverage in trucks and execute on long-standing plans to diversify and grow the business.

Read the full article here:
Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

If you wrote up a list of outperforming auto and commercial vehicle component stocks, it would look for all intents and purposes like you were writing in invisible ink. A few companies like Aptiv (APTV) and Magna (MGA) have been less-bad than average, and Allison (ALSN) and tiny Commercial Vehicle Group (CVGI) are up strongly over the past year, but for the most part, this has been a pretty awful sector as investors have written off the passenger vehicle market for the near term, priced in the commercial truck fall-off, and continued assuming that internal combustion engines are doomed.

There might be a little hyperbole there, but not too much, and Tenneco (TEN) certainly continues to get almost no benefit of the doubt. Although second-quarter margins and margin guidance weren't great, the Street seems to be pricing these shares for ugly future margins and cash flow. Likewise, the idea that spinning off the Ride Performance and Aftermarket business will unlock any value seems to be largely dismissed at present. I really can't say that Tenneco is a top-notch idea now, but sector-wide valuations seem to be washing out, and this is a name worth watching for an eventual recovery opportunity.

Continue here:
With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

Allison Transmission Running Over The Bears

Whatever the future may look like for Allison Transmission (ALSN) and its role in a post-electric truck world, the company is executing remarkably well today. With solid growth in its core North American truck business augmented by improving demand from energy and mining applications, as well as share gains in trucks outside North America, Allison is posting exceptional incremental margins and forcing bearish sell-siders to trot out “we’re not wrong… we’re just early” calls.

I’m not in the “the sky is going to fall” camp with Allison, but it’s a tough story to model out given the likelihood that electric trucks eventually will grab share in strong core Allison markets like dump trucks, refuse trucks, and other vocational applications like drayage. I believe a key question is whether Allison can continue to gain share in overseas markets (where penetration is low) and whether they can fight off competition from other transmission alternatives like the Cummins (CMI)/Eaton (ETN) JV.

Read more here:
Allison Transmission Running Over The Bears

Improving End-Markets And Market Share Not Enough For Cummins

Investors are definitely conflicted about machinery stocks these days, with mining and ag doing well, but a lot less enthusiasm for construction and trucking as investors worry about how the end of the cycle will play out. I didn’t see enough upside in Cummins (CMI) to want to dive in back in late May, and the market-lagging return since then doesn’t exactly have me regretting that call (though Cummins has done comparatively better than most heavy machinery names over that time).

I can’t say that I feel all that differently about Cummins now. The North American truck cycle looks like it has longer legs (into 2019), but that doesn’t really change the fundamental long-term valuation picture. Likewise with the long-awaited recovery in power gen and strength in markets like mining and oil/gas. Although the shares do look a little undervalued on a near-term basis and I like the company’s ongoing moves to invest in electrification products/technology, I just don’t see the upside to warrant taking a new position now.

Read the full article here:
Improving End-Markets And Market Share Not Enough For Cummins

The Wall Of Worry Looks A Little Higher At Cummins

Every company has risks and challenges and Cummins (CMI) is no exception, even if some of those risks are pretty familiar (end-market cycles, the risk of vertical integration). While the prospect of electric trucks is a newer challenge, as is a recent product quality/warranty issue, there's really never been a time I can recall when there wasn't some threat hanging over the shares.

While I think some of the risks and worries are overstated, I don't necessarily find these shares cheap today. I could see paying up into the mid-$150s for the shares, but that's not really all that much upside given where we are in the cycle. What's more, it seems like Cummins gets a little more benefit of the doubt than other component companies - some of the same sell-side analysts who believe that electrification will crush Allison Transmission (ALSN) are more sanguine on Cummins' future in an EV world.

Read more here:
The Wall Of Worry Looks A Little Higher At Cummins

Allison Transmission Driving Unfamiliar Roads With Dim Headlights

Allison Transmission (ALSN) has been a fascinating stock to follow over the last year or so, perhaps not so much for the stock price action or the nature of the product, but in how the sell-side is trying to process and project the threats to the company’s strong, high-margin business in automatic transmissions for commercial vehicles. A small cadre of analysts is dutifully predicting future doom for Allison as electric vehicles become more viable for commercial applications, and in the meantime, they just waive off quarters where Allison beats their EBITDA estimates by 20% or more.

To be sure, the electrification of commercial vehicles is a very serious threat to Allison’s business as it stands today, and given that management hasn’t offered much detail on what they have cooking in R&D, it’s hard to have much confidence that they will succeed in innovating their way into the future of electric vehicles (and with attractive margins).

Fortunately for me, I don’t have to deal with an institutional sales force and pretend I have all the answers, so I’ll flatly admit that valuing Allison today is quite difficult and involves a lot more guesswork than normal. While I’d be interested in the shares when they to drop into the high-to-mid $30s, I wouldn’t chase them in the $40s given the risks that Class 8 demand could fade combined with the long-term EV uncertainties.

Read the full article here:
Allison Transmission Driving Unfamiliar Roads With Dim Headlights

Dana Doing The Right Things And Reaping The Benefits

Finding an undervalued stock with a solid story behind it is always good, but finding that story getting better with time is even better. That's what appears to be happening with Dana (DAN), as this diversified supplier of components for passenger, commercial, and off-highway vehicles continues to execute well on its plan to grow content, improve margins, and position itself for the evolving demands of its end-markets.

It can be deceptively easy to get caught up in and taken along with Wall Street's short attention span-driven boom-and-doom cycles. With that in mind, I've been cautious about fundamentally overhauling my long-term growth and profitability assumptions for the business. I do like Dana's prospects for value-adding M&A, margin self-improvement, and leveraging a better mix (including more power tech products down the line), but I don't believe Dana is going to suddenly become a FCF-generating machine in an industry where mid-single-digit margins are generally the best that even great companies (like Cummins (CMI)) can do. To that end, while a fair value in the $20s seems reasonable, and I'm comfortable modeling exceptional cash flow growth, today's valuation already seems to be pricing in a lot of progress.

Read more here:
Dana Doing The Right Things And Reaping The Benefits

Cummins Revving Back Up

Cummins (CMI), a very well-run manufacturer of engines and components for trucks and other commercial vehicles, is a case in point as to why I’m often critical of typical sell-side valuation methodologies. Despite the fact that Cummins has been through many up-and-down cycles in the past decades, analysts still manage to freak out during the downswings – slashing estimates, cutting price targets, and just about everything short of walking around lower Manhattan wearing sandwich boards proclaiming that the end is nigh. And when orders for trucks and other equipment start to bounce back and signs of margin leverage reappear, they show a level of excitement close to that of ferrets that have overdosed on Mountain Dew.

To that end, the sell-side’s fair value for Cummins is about 60% higher than it was when I last wrote about the company for Seeking Alpha (in late September of 2016) and the revenue estimate for 2017 is about 14% higher.

I still like Cummins as a company, but the stock is harder to love now. The shares already trade at more than 7x what I think will likely be mid-cycle EBITDA, and seem to be pricing in double-digit annualized FCF growth over the next decade – a number I think Cummins could hit, but that doesn’t leave much room to maneuver (or disappoint). To that end, I’m not all that worried about Cummins’s exposure/vulnerability to electrification in heavy vehicles or competition from vertical integration, but I’m concerned that valuation is back to that point where perceived missteps will be punished harshly.

Continue here:
Cummins Revving Back Up

Shifting Perceptions Around Allison Transmission

When I last wrote about Allison Transmission (NYSE:ALSN) in September of 2016, I thought the shares had decent appeal as a buy-and-hold ahead of a recovery in commercial trucks, an eventual recovery in energy, and ongoing growth in commercial automatic transmission penetration rates outside of North America. The shares have exceeded my expectations since then, up about 35%, as companies like Allison and Cummins (NYSE:CMI) have benefited from improving build rates in commercial vehicles.

At today's valuation, I'm more nervous about making a “buy” call. Allison has been logging nice beat-and-raise quarters, and I think Allison's management is quite good. What's more, energy and defense are still barely contributing to results right now and should offer more in the next few years, while OUS adoption of automatic transmissions remains a long-term driver. The “but” is the prospect of accelerating timelines for the adoption of electric vehicles in the commercial space – attention on this market has increased to a point where Cummins, Daimler, Volvo, Navistar (NYSE:NAV), and even typically-conservative PACCAR (NASDAQ:PCAR) have all come out with commentary on their plans/roadmaps for future EV's. Actual adoption of EVs in commercial applications like refuse hauling, metro transit, and straight Class 8's is likely to take many years, but I'd be careful paying up for a cyclical company that could be facing meaningful market erosion within the next decade.

Read more here:
Shifting Perceptions Around Allison Transmission

Commercial Vehicle Paddling Through The Rapids

Commercial Vehicle Group (NASDAQ:CVGI) continues to see fierce headwinds across its business from the weak end-market demand for North American heavy trucks, construction and ag equipment, but management's efforts to improve the cost structure and cash flow are paying off. The market has noticed, with the shares more than doubling since my last update and trouncing the performance of other commercial vehicle suppliers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), and Grammer (OTC:GMEGF).

Looking ahead, I'm cautiously optimistic that there is more upside potential. Management has meaningfully improved the cost structure and margins of the Construction/Ag business despite ongoing revenue contraction and the Truck business should start to improve later in 2017 as the commercial truck market stabilizes. If Commercial Vehicle can grow revenue at an annualized rate of around 2.5% from the trough of 2017 and generate FCF margins in the 3% to 4% in the better years ahead, a fair value above $7 is still plausible.

Continue here:
Commercial Vehicle Paddling Through The Rapids

Cummins Seems To Be In A Period Of Transition

I liked Cummins (NYSE:CMI) back in February, when the sell-side's predictable doom cycle had price targets (and the share price) below $100 and the shares looked cheap even on modest long-term growth expectations. Since then, the shares have climbed about 20% - in the same ballpark as other commercial vehicle component companies like Allison Transmission (NYSE:ALSN), Dana (NYSE:DAN), and Tenneco (NYSE:TEN).

Now, though, investors are looking at a situation where the company is a little further through the ugly part of the cycle and where margins have held up pretty well, but where the shares now bake in more robust expectations. Cummins still has the wherewithal to do something significant through M&A, but management's caution here is both cause for celebration (being careful to preserve value) and concern (is there a thesis-changing deal out there?). That said, many of Cummins' customers continue to push ahead with internal engine efforts, and I think the risk/reward equation is more balanced today.

Read the full article here:
Cummins Seems To Be In A Period Of Transition

Tenneco Looking Almost Too Good Lately

A healthy skepticism, bordering on paranoia, is a good asset for investors to have. I liked Tenneco (NYSE:TEN) earlier this year on the prospects for content gains to drive growth above industry build rates and for investors to come around to the realization that growing light vehicle electrification isn't going to mean the end of internal combustion engines (at least not in 10 to 20 years). That said, I was surprised to see the shares climb more than 25% from that last article, as many auto/truck component companies have enjoyed a strong rally since the summer.

My skeptic spidey-sense is still tingling a little, though, because the shares still look undervalued. Strong demand for Tenneco-containing vehicles like the Ford (NYSE:F) Super Duty and F150 and General Motors' (NYSE:GM) Silverado, Sierra, and Escalade, and surprising resilience with Volkswagen's (OTCPK:VLKAY) Jetta platform are all positives, as is the margin leverage. Still, with my models now pointing to a fair value closer to $60, I'm a little concerned that I'm overlooking something. On the other hand, for those in the "don't worry, be happy" camp, business continues to develop nicely here, as the company logs beat-and-raise quarters, benefits from numerous model launches, and still looks like it has more to offer in terms of upside.

Read the full article here:
Tenneco Looking Almost Too Good Lately