Cummins Inc.: The Bear

Case for 2016

Source: Cummins

Growing uncertainty in key trucking market

#1

Forecast for on-highway engine markets

Source: Cummins’ Q4 Earnings Presentation.

The challenge: North America

Cummins predicts a 25% fall in the production of heavy-duty trucks in North America this year.

Paccar expects Class 8 truck (key heavy-duty segment) sales to decline 7%-17% this year.

Major truck manufacturers, including Daimler and Volvo, recently announced aggressive layoffs at their facilities in North America.

A warning signal

Cummins’ 5-liter V8 engine made for Nissan. Source: Cummins engines website.

Cummins is scaling back production of its light-duty engines as it didn’t find takers for its 5-liter V8 engines after Nissan.

Why North America matters

2015 engine segment sales by region. Source: Cummins’ Q4 Earnings Presentation.

The U.S. and Canada made up 69% and 61% of Cummins’ engines and total revenue, respectively, in 2015

Declining market share#2

A yellow flag

What: Cummins’ share of the North American heavy-duty engines market slipped two percentage points to 33% in 2015.

So what: Heavy-duty is the largest end market for Cummins’ engines business.

Now what: Cummins expects its heavy-duty share to be between 30% and 33% this year.

Why is Cummins losing its hold?

Key customer Paccar has vertically integrated and expects to extend its own engines to 50% of its Kenworth and Peterbilt fleet within a year or two. Paccar Peterbilt Model 389 is currently

available with Paccar MX-13 and Cummins ISX15 engines. Source: Paccar website.

Off-highway markets a challenge

#3

Persistent weakness

Cummins’ off-highway engine sales slumped 22% year over year in Q4 as demand from mining, construction, marine, power, and oil and gas markets weakened.

No recovery in sight. Caterpillar, which operates in each of the above markets, projects its mining-equipment sales to slump 15%-20%, and energy and transportation equipment sales to decline 10%-15% this year.

Why it’s a concern

Off-highway markets accounted for one-third of Cummins’ engines revenue last year.

Cummins’ 2015 engine segment sales mix. Source: Company’s Q4 Earnings Presentation.

Global markets slowing down#4

The significance

Markets outside the U.S./Canada contribute nearly 40% to Cummins’ total revenue.

Source: Cummins Q4 Earnings Presentation.

The concerns

Cummins’ international revenue declined 11% in 2015.

Brazil: Truck production expected to slip 20% in 2016 after falling 50% last year. Cummins’ sales from Brazil slumped 48% in 2015.

China: Demand for medium-and-heavy-duty trucks slipped 24% in 2015. Cummins projects it to fall another 4% this year.

A stronger U.S. dollar is an added headwind as it means lower international revenue when converted.

So should you buy Cummins now?

Thanks to the massive challenges facing Cummins, analysts project its earnings to

fall 12% this year. So any optimism appears to be already baked into the

stock price, and it could be a bumpy ride going forward. Investors should remain

cautious.

This Could Be The Next Billion-Dollar iSecret