BofA Securities analyst Michael Feniger considers Cummins to be a “strong operator” with a solid balance sheet. However, there are some concerns that he believes are worth noting. As a result, Feniger downgraded Cummins stock from Hold to Sell, while also revising the target price downward from $243 to $225.
Cyclicality and Earnings Projections
One of the primary factors contributing to Feniger’s decision is the cyclicality commonly associated with Cummins. Analysts polled by FactSet anticipate a slight decline in Cummins’ earnings per share in 2024, projecting a figure of $19.40. This contrasts with the expected earnings per share of $19.83 for the entirety of 2023. Although truck and truck-part manufacturers fared well in the past year — with Cummins experiencing a 20% increase in sales and earnings of $15.67 per share in 2022 — Feniger expresses skepticism regarding the consensus estimate for 2024. His projections indicate that earnings per share could amount to $18 due to a 20% decrease in North American truck production compared to 2023.
Investing in the Future
Another factor influencing Cummins’ performance is its substantial investment efforts. Despite Feniger’s reservations about the adoption rate of electric vehicles within the trucking industry, Cummins is heavily investing in its platform to proactively adapt to a potentially stricter regulatory environment. In 2023 alone, Cummins allocated around $1.3 billion toward capital expenditures, a significant increase from the average of $750 million spent in previous years.
Exploring Alternative Technologies
While battery-powered trucks have shown promise for certain short-haul applications, their high cost and weight currently limit the viability of fully electric trucks on a larger scale. Cummins recognizes this challenge and is actively exploring alternative solutions. One of the areas of interest is hydrogen fuel, which has the potential to decarbonize heavy-duty trucking. Consequently, Cummins is investing in technologies associated with hydrogen fuel as well.
By delving into the challenges and investments that Cummins faces, it becomes evident that the company is actively addressing industry trends and focusing on long-term growth. However, analysts like Michael Feniger continue to assess the potential risks presented by cyclicality and evolving regulatory landscapes.
Cummins’ Accelera Unit Faces Significant Financial Losses
According to a report by analyst Feniger, Cummins’ zero-emission solutions division, known as Accelera, is expected to incur significant financial losses in the range of $420 million to $440 million of Ebitda (earnings before interest, taxes, depreciation, and amortization) in 2023. Cummins, as a whole, is projected to generate around $5.1 billion in Ebitda for the full year. However, Cummins aims to break even by 2027, with the hydrogen economy being one of their primary growth opportunities.
Feniger raises skepticism regarding the potential for hydrogen technologies to generate substantial sales numbers by that time. This skepticism arises from cautious sentiments expressed by industry stakeholders at a hydrogen technology conference hosted by BofA in December. Failure to meet this goal could be disappointing for investors.
As a result of this bearish outlook, Cummins’ stock experienced a 2.1% decline to $228.40 per share during early trading on Friday. In contrast, the S&P 500 and Nasdaq Composite saw modest gains of approximately 0.2%.
Over the past twelve months, Cummins’ shares have declined by about 3%, significantly underperforming the S&P 500 by 26 percentage points. These shares are currently valued at only 12 times the estimated earnings for 2024, whereas the S&P 500 trades at a higher multiple of approximately 20 times earnings. This relatively low multiple is characteristic of cyclical companies like Cummins during favorable economic conditions.
Interestingly, only 35% of analysts covering Cummins stock have assigned it a Buy rating. The average analyst price target for the stock stands at approximately $256. In comparison, the average Buy-rating ratio for stocks in the S&P 500 is around 55%.
Despite the downgrade to Sell, the overall Sell-rating ratio for Cummins stock remains unchanged. Currently, about 9% of total analysts rate the stock as Sell, which aligns with the average Sell-rating ratio for stocks in the S&P 500 at approximately 7%.