Analyst: Cummins' Earnings Visibility Clouded By Overhang, Peaking End Markets

Ongoing uncertainty in a product campaign could act as an overhang on Cummins Inc CMI’s earnings, according to Buckingham Research Group.

The Analyst

Buckingham's Neil Frohnapple downgraded Cummins from Buy to Neutral and lowered the stock’s price target from $205 to $160.

The Thesis

Cummins incurred a $187-million charge in the first quarter related to a “previously disclosed product campaign," Frohnapple said in a Wednesday note.

A final resolution could take up to six months, with the charge acting as an overhang on earnings for another two quarters, the analyst said.

The engine manufacturer reported a Q1 adjusted EPS of $3.30 against a $2.89 estimate and sales of $5.6 billion versus a $5.14-billion estimate on Tuesday.

Several of the company’s end markets, such as Class 8 trucks and light- and medium-duty trucks, are close to their peak, according to Buckingham.

“As a result, we believe the risk-reward profile is more attractive for other industrials with greater earnings visibility and more cyclical upside such as Caterpillar Inc CAT or more meaningful company-specific growth initiatives such as Meritor Inc MTOR,” Frohnapple said.