Shares of Cummins Inc. rose toward a third straight gain Monday, after BofA Securities analyst Ross Gilardi said it’s time to buy, as the engine maker stands to benefit from the inflation and hydrogen trades more than its peers.
The stock (NYS:CMI) rose 0.3% in afternoon trading, to buck the weakness among its peers and the broader stock market. The SPDR Industrial Select Sector exchange-traded fund (PSE:XLI) fell 0.4%, with 52 of 74 equity components losing ground, while the S&P 500 index (S&P:SPX) lost 0.5%.
In a research note titled, “Elongated cycle + hydrogen is attractive one-two punch — upgrade to buy,” Gilardi raised his rating on Cummins to buy from neutral and raised his stock price target by 10%, to $325 from $295.
Gilardi wrote in the note that he believes owning machinery stocks is a call on inflation and capital spending, and he believes the inflation trade will persist for the next six-to-12 months. What could also provide a boost for Cummins and other machinery stocks is that negotiations on a federal infrastructure bill seem to be making some “tentative progress.”
But for Cummins in particular, Gilardi said the company has been “far more upfront about the secular risks to its diesel engine business from battery electric and hydrogen” than its peers, such as Caterpillar Inc. (NYS:CAT) , and has been far more aggressive in investing in these new categories.
As a result, Gilardi believes Cummins’ new power assets could “conservatively” be worth $3.6 billion, or $25 a share, as the company is poised to win more electrolyzer and/or rail business.
The company reported earlier this month that its New Power business had first-quarter sales of $35 million, which was just 0.6% of total sales of $6.09 billion, but grew 250% from a year ago while overall sales increased 22%.
Gilardi’s new bullish view makes him a minority among the Wall Street community. He is one of the only nine of 24 analysts surveyed by FactSet who rate Cummins the equivalent of buy, while 14 analysts rate Cummins the equivalent of hold and one rates it the equivalent of sell. Gilardi’s new price target is 14% above the average price target of $285.39.
“The consensus view is that Cummins will lose market share in the medium- and heavy-duty truck markets as battery-electric and hydrogen technology make headway,” Gilardi wrote.
“Cummins has its own electrified powertrain that it is marketing to the commercial vehicle industry and a firm stake in the ground in hydrogen,” he wrote. “We don’t think investors will find much evidence of share loss in the medium- or heavy-duty truck market for at least the next 3-4 years.”
Cummins stock has rallied 17.8% year to date, while Caterpillar shares have run up 34.5%, the industrial ETF has climbed 17.8% and the S&P 500 has gained 10.6%.