William Blair Cautious on Cummins Inc. (CMI) Amid Navistar Volkswagen Deal

William Blair analyst Lawrence De Maria provides commentary on Cummins Inc. (NYSE:CMI) on the heels of Navistar announcing a deal where Volkswagen will take an equity stake in Navistar of 16.6%, shelling out $15.76 per share for a collective 16.2 million shares, a transaction totaling $256 million in scope. So what’s the big deal? While Cummins manufactures diesel engines, Volkswagen could now plan to supply Navistar with engines.

The analyst notes, “We have expected some market share attrition on the heavy-duty truck engine side, and this has been a continuing concern with investors.” De Maria underscores the root of his skepticism in how this deal negatively impacts the global diesel engine manufacturer, contending, “We believe that vertical integration presents some real challenges and that it will continue to be viewed as bearish for Cummins.”

In light of this, De Maria reiterates a Market Perform rating on shares of CMI with a $110 price target, which represents a nearly 9% upside from where the stock is currently trading.

“We speculate why Cummins would not take an equity stake itself in Navistar, given that a transaction like this was generally considered inevitable. However, buying a stake in Navistar would likely cause Cummins’ independence, which it prides itself on, to be brought into question, and it might put its franchise with Paccar at risk,” the analyst concludes.

De Maria forecasts 2016 EPS of $7.90 and 2017 EPS of $7.25, anticipating “that the headwinds facing Cummins will probably play out over the next couple of years, although the company is executing its restructuring and cost cutting to help insulate the downside.”

From the analyst’s perspective, CMI is in a place where it could look to acquire, thanks to a solid balance sheet, and then the company could “solidify its market position.”

As usual, we recommend taking analyst notes with a grain of salt. According to TipRanks, one-star analyst Lawrence De Maria is ranked #3,122 out of 4,147 analysts. Maria has a 37% success rate and faces a loss of 1.5% in his yearly returns. However, when recommending CMI, De Maria gains 9.7% in average profits on the stock.

TipRanks analytics exhibit CMI as a Hold. Based on 11 analysts polled in the last 3 months, 1 rates a Buy on CMI, 8 maintain a Hold, while 2 issue a Sell. The consensus price target stands at $120.13.


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