Oppenheimer Sees A Good Entry Point In Cummins Shares

A mismatch between sentiment and adoption cycle has provided an entry point for shares of power generation company Cummins Inc. CMI, according to Oppenheimer.

The Analyst

Oppenheimer analyst Noah Kaye initiated coverage of Cummins shares with an Outperform rating and $192 price target.

The Thesis

Cummins is a secular net beneficiary of more stringent global emission standards, with favorable medium-term cyclicals, Kaye said in a Wednesday note. (See Kaye's track record here.) 

Recent technology investments that can expand wallet share, support customer loyalty and improve operating discipline may be an underappreciated part of the Cummins story, the analyst said.

The company plans to invest $500 million in electrification and bring multiple offerings to market by 2020, Kaye said. Notwithstanding the challenge from vertically integrated OEMs with scale/enterprise, the analyst said the company's customer base, breadth/technical expertise in industrial applications, service infrastructure and financial strength are competitive advantages.

Oppenheimer also sees Cummins benefiting from global emission tailwinds, with the future compliance supporting higher engine ASPs and component segment growth. Macro outlook is positive, with leading indicators suggesting North American on-highway sales growth as well as international growth opportunities, Kaye said. 

Oppenheimer estimates 4 percent revenue CAGR, a 90-basis-point segment margin expansion and 7 percent free cash flow CAGR from fiscal year 2017 to 2020. The company's leverage suggests the availability of $4.5 billion to $5 billion in highly liquid marketable securities for M&A, the analyst said.

The Price Action

Cummins shares are up over 21 percent year-to-date.

At the time of writing, Cummins shares were up 0.79 percent at $166.69.

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