Initiation of Research Coverage: Two Capital Goods Companies

Monday, January 30, 2012

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.

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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)

Coverage Universe
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.

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