William Blair Downgrades Cummins, Notes Headwinds Will Continue

Despite the fact that Cummins is a "best-in-class" capital goods stock, Lawrence De Maria of William Blair downgraded the stock to Market Perform from Outperform with a price target slashed to $110 from a previous $150.

In a report published Friday, De Maria stated that a combination of cyclical and specific headwinds will affect Cummins' business "heading into next year and possibly beyond." The analyst also noted that investors who are hoping for a "significant" capital allocation event at the company's November analyst meeting may be disappointed as a "major positive announcement" is "unlikely."

Related Link: Barclays Initiates Coverage On Cummins

Capital Spending Down Next Year

Growth, Outperformance Story Closes

Tailwinds Ahead

Bottom Line

De Maria continued that capital spending for "virtually every" end-market will "take another leg down" next year. Moreover, there is a lack of catalysts that could jolt the economy other than an acceleration in the global economy.

The analyst suggested that for Cummins stock to work, there needs to be a positive inflection in global off-highway sales, which at this point seems "highly unlikely" as "virtually all" markets are posed to weaken further.

"The growth and outperformance (content) story has largely run its course and is now pausing without major emissions changes; absent a major shift in capital allocation, we believe Cummins will be more beholden to regional cycles than it has been the past few years and North America is looking to be down moderately next year," De Maria wrote.

"This presents a risk to the stock."

Finally, De Maria pointed out that potential tailwinds heading into 2016 consist of share repurchases, market share gains in China, growth in India, the new QSK engine and Nissan Titan sales.

However, these tailwinds are "not likely" to offset the ongoing headwinds unless off-highway inflects positively. In fact, the analyst argued that further downside is possible if a bearish scenario plays out "more egregiously."

The growth and outperformance story has "largely run its course" and is now "pausing." Absent a "major" and "bold" shift in capital allocation, the stock is likely to remain in a trading range.