Wait, Cummins Bears; New Piper Jaffray Survey Suggests Upside Coming

• In a report issued Tuesday, Piper Jaffray analysts Alexander E. Potter and Winnie Dong reiterated an Overweight rating on Cummins Inc. CMI.
• The analysts argued that a recent survey suggests the secular bear thesis on the company is wrong, as its market share will surge rather than fall.
• Despite the bullishness, the firm revised its estimates and consequently adjusted its price target to reflect a 13x FY17 EPS valuation. The new price target is $123 – down from $115.

Piper Jaffray analysts reiterated an Overweight rating on Cummins on Tuesday, even though the market is not particularly bullish on the stock due to "a weakening U.S. truck cycle, uncertainty in China, and feeble demand for off-highway engines."

While these cyclical concerns cannot be overlooked, and the firm consequently moved its estimates lower to reflect this scenario, the analysts noted that "there's a secular component to the bear thesis too" and they think it's inaccurate.

The firm conducted a survey on more than 500 Class 8 truck fleets in December, and concluded that the Cummins + Eaton drivetrain (which is basically a Cummins engine paired with an Eaton transmission system) will gain share in the Class 8 truck market. These results contradict the bears' short thesis, which claims that "truck makers' own in-house drivetrains will win share." It may not be until the second half of 2016, the report assured. But with Cummings trading at 10.2x FY17 EPS (close to a multi-year low), the experts believe "investors will revisit this stock."

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.