Deutsche Bank Downgrades Allison Transmission And Cummins: What You Should Know

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  • Allison Transmission Holdings Inc ALSN shares are down 21 percent year-to-date, while Cummins Inc. CMI shares have lost 24 percent.
  • Deutsche Bank’s Vishal Shah downgraded the ratings on the companies from Buy to Hold.
  • The Street estimates for 2016 for both the companies seem too optimistic, in view of the sector headwinds, Shah mentioned.

Analyst Vishal Shah said that the 2016 estimates for these two companies appear to be “too optimistic.” Despite the recent global price correction at the end of August, the estimates still do not fully discount the possible headwinds.

Shah enumerated the sector headwinds that could result in a downward revision in the 2016 earnings estimates as:

  1. Off-Highway estimates need to be revised down to reflect the lower commodity price environment since the August sell-off. Mining and oil & gas equipment spending could decline by 10-20 percent in 2016.
  2. The North America On-Highway cycle may have peaked, which is not reflected in the Street estimates. Shah expects “decline of 10% for Class 8 line-haul (checks suggest fleet spending will slow), down 3% for Bus (growth in school-aged children is slowing, lower school spending), flat to slightly down for class 8 vocational volumes (oil & gas overhang, flattening delivery vehicle spend)”
  3. In view of the recent debt downgrade in Brazil and weakening FAI outlook for China, the international commercial vehicle sales of Allison Transmission and Cummins could be softer than was earlier anticipated. Shah expects a mid-single digit decline in 2016.

“Taking these factors into consideration, we view the risk/reward for ALSN and CMI as balanced,” the Deutsche Bank report stated.

Cummins may witness share contraction in the North America heavy and medium duty markets. “As for ALSN, we expect an unfavorable Y/Y change in revenue mix to act as a headwind on EBITDA margins,” Shah added.

The price target for Allison Transmission has been reduced from $38 to $28, while the price target for Cummins has been revised down from $154 to $123.

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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsDeutsche BankVishal Shah
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