Cummins' Big Downgrade: Why Buckingham Pulled The Trigger

Buckingham Research downgraded Cummins Inc. CMI shares to Neutral from Buy on Wednesday, saying the engine maker's end markets are likely to be in retreat overall for the next two years. The brokerage also believes that CMI will be losing a couple hundred basis point of share in the North American truck markets.

"With key new products at least 1-2 years away, the shares lack a catalyst for EPS improvement, and cost cutting and share repurchase are not enough to drive a higher valuation in our view," analyst Jeffrey Kauffman wrote in a note to clients.

Kauffman, who also reduced the price target on CMI shares to $95 from $100, said though trucking company P&Ls in North America remain strong, he believes the market is in a two year transition from truck to trailer capital spending.

"With tepid freight growth, energy and transportation equipment markets in retreat, and emerging markets continuing to show no bottom yet, there are few catalysts for CMI to drive EPS growth beyond cost cutting and share repurchases," the analyst noted.

Kauffman continued, "CMI has a strong position in North America with about 33% of the HD truck engine market, and about 78% of the MD/Bus engine market. However, with sales slowing, we believe OEMs are likely to more heavily incent their own vertically integrated product, leading to some market share losses for CMI."

The analyst also noted that international trends are not "where we hoped they would be," although the new acquisitive focus could put the company in a stronger position when markets eventually do improve, but this may be measured in years, not months.

Kauffman also slashed his 2016 EPS view to $7.65 from $8.20, while Street expects earnings of $7.83 a share.

"While we believe that CMI's management team can create incremental value through the downturn by better utilizing its strong balance sheet and cash flows, we are of the belief that smaller acquisitions will make less of a difference, and that the risk of downside EPS reductions continues to outweigh the company's ability to deliver better than expected news," the analyst added.

Shares of Cummins were down 2.18 percent to $105.66. The analyst said though his $95 price target implies 12 percent downside on price, a 3.6 percent dividend yield would result in a net negative 8-9 percent total return.