William Blair & Company initiated research coverage of Cummins Inc. (CMI $106.50) with a Market Perform rating and WABCO Holdings Inc. (WBC $52.00) with an Outperform rating.
Analyst Lawrence T. De Maria estimated that Cummins, which designs, manufactures, distributes, and services engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions, and electrical power generation systems, would earn $8.85 per share in 2011 and $10.30 per share in 2012. He assigned a $112 12-month price target to Cummins.
"Positive investment attributes include 1) key end-market strength, including a cyclical upturn in global commercial vehicle and engine volumes, as well as certain power generation markets, driven by increased transportation needs and evolving emissions standards; 2) best-in-class presence in emerging markets and the likelihood of continued growth through its fit-for-market strategy; and 3) a premier operating and return profile with very low financial risk, among the best in the capital goods universe," De Maria said. "We believe that Cummins is an exceptionally well-run company, with strong positions in attractive global markets. However, we are initiating coverage of Cummins with a Market Perform rating because of the threat of continued vertical integration at OEM customers, moderating growth in the North America trucking market after 2012, valuation, and our preference for large-cap machinery peers Caterpillar and Joy Global."
De Maria estimated that Wabco, a leading supplier of safety and control systems, primarily braking systems, for commercial vehicle production, would earn $4.68 per share in 2011 and $4.50 per share in 2012. He assigned a $62 12-month price target to Wabco.
"We are initiating coverage of Wabco with an Outperform rating, based on: 1) the massive upside potential in 2013-and-beyond European trucking production volumes, driven by Euro 6 emissions standards (2014), economic recovery post-2012 weakness, higher safety standards, pent-up replacement demand, and European trucking volumes still 30% below peak level; 2) the growing presence in emerging markets and North America and the likelihood of increased Wabco content per vehicle; and 3) the attractive risk/reward profile, supported by a better peak-to-trough earnings profile through the next cycle, resulting from structural cost takeouts and operational efficiencies," he said. "Further, we believe Wabco is a well-run company with strong positions in attractive markets, and we recommend buying the stock before a potential upturn in European commercial vehicle production in 2013 becomes fully factored into expectations."
William Blair & Company is a global investment banking and asset management firm. We are committed to building enduring relationships with our clients and providing expertise and solutions to meet their evolving needs. An independent and employee-owned firm, William Blair is based in Chicago, with office locations in 10 cities including London, New York, Shanghai, and Zurich. For more information, please visit williamblair.com.
View coverage list
William Blair & Company, L.L.C. receives or seeks to receive compensation for investment banking services from Cummins Inc. and WABCO Holdings Inc. Investors should consider this report as a single factor in making an investment decision.
William Blair & Company, L.L.C. is a market maker in the securities of Cummins Inc. and WABCO Holdings Inc. and may have a long or short position.
Additional information is available upon request.
Current Ratings Distribution
(as of 12/31/11)
Outperform (Buy): 59%
Market Perform (Hold): 33%
Underperform (Sell): 1%
Inv. Banking Relationships*
Outperform (Buy): 8%
Market Perform (Hold): 1%
Underperform (Sell): 0%
* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months.
Stock ratings, price targets, and valuation methodologies:
William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings and price targets (where used) reflect the expected performance of the stock relative to the broader market (generally the S&P 500, unless otherwise indicated) over the next 12 months. The assessment of expected performance is a function of near-, intermediate-, and long-term company fundamentals, industry outlook, confidence in earnings estimates, valuation (and our valuation methodology), and other factors. Outperform (O) – stock expected to outperform the broader market over the next 12 months; Market Perform (M) – stock expected to perform approximately in line with the broader market over the next 12 months; Underperform (U) – stock expected to underperform the broader market over the next 12 months; not rated (NR) – the stock is not currently rated. The valuation methodologies used to determine price targets (where used) include (but are not limited to) price-to-earnings multiple (P/E), relative P/E (compared with the relevant market), P/E-to-growth-rate (PEG) ratio, market capitalization/revenue multiple, enterprise value/EBITDA ratio, discounted cash flow, and others.
The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) – Fundamental risk is higher relative to the broader William Blair universe.
The ratings, price targets (where used), valuation methodologies, and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time.
The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm's departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors.
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies—to our clients and our trading desks—that are contrary to opinions expressed in this research. Our asset management and trading desks may make investment decisions that are inconsistent with recommendations or views expressed in this report. We will from time to time have long or short positions in, act as principal in, and buy or sell the securities referred to in this report. Our research is disseminated primarily electronically, and in some instances in printed form. Electronic research is simultaneously available to all clients. This research is for our clients only. No part of this material may be copied or duplicated in any form by any means or redistributed without the prior written consent of William Blair & Company, L.L.C.
THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES. THE FACTUAL STATEMENTS HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE, BUT SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR COMPLETENESS OR OTHERWISE. OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. PRICES SHOWN ARE APPROXIMATE.
THIS MATERIAL HAS BEEN APPROVED FOR DISTRIBUTION IN THE UNITED KINGDOM BY WILLIAM BLAIR INTERNATIONAL, LIMITED, REGULATED BY THE FINANCIAL SERVICES AUTHORITY (FSA), AND IS DIRECTED ONLY AT, AND IS ONLY MADE AVAILABLE TO, PERSONS FALLING WITHIN COB 3.5 AND 3.6 OF THE FSA HANDBOOK (BEING "ELIGIBLE COUNTERPARTIES" AND "PROFESSIONAL CLIENTS"). THIS DOCUMENT IS NOT TO BE DISTRIBUTED OR PASSED ON TO ANY "RETAIL CLIENTS." NO PERSONS OTHER THAN PERSONS TO WHOM THIS DOCUMENT IS DIRECTED SHOULD RELY ON IT OR ITS CONTENTS OR USE IT AS THE BASIS TO MAKE AN INVESTMENT DECISION.
"WILLIAM BLAIR & COMPANY" AND "WILLIAM BLAIR & COMPANY (SCRIPT)" ARE REGISTERED TRADEMARKS OF WILLIAM BLAIR & COMPANY, L.L.C. Copyright 2011, William Blair & Company, L.L.C.