Citi Upgrades PACCAR, Downgrades Cummins, Says WABCO Is A Buy

January 24, 2016

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Citi Upgrades PACCAR, Downgrades Cummins, Says WABCO Is A Buy

On Monday, Citi analyst Timothy Thein and his team suggested a pair trade for North American truck stocks.
The firm recommended Buy-rated shares of PACCAR Inc (NASDAQ: PCAR) over Neutral-rated Cummins Inc. (NYSE: CMI).
In addition, the experts issued a Buy rating on shares of WABCO Holdings Inc. (NYSE: WBC).

In a report issued Monday, analysts at Citi upgraded shares of PACCAR from Neutral to Buy, while downgrading Cummins from Buy to Neutral. The experts fixed respective price targets of $54.00 and $95.00. In addition, they issued a Buy rating on WABCO, accompanied by a $110.00 price target.

The analysts explicated that, while freight fundamentals remain sluggish, and “excess truck inv’s will weigh on near-term build rates,” history suggests relative share underperformance could be diminishing. The experts believe PACCAR is an “earlier cycle” beneficiary as sentiment shifts, and continue to recommend WABCO – especially after the marked decline the stock has experienced in recent weeks.

Why PACCAR Over Cummins?

The research note went on to explain why the firm prefers PACCAR over Cummins. The analysts commented that sustained growth in high-margin parts coupled with an ongoing rebound in Western Europe “should help to drive more modest ’16 decrimentals than the bears assume.” In addition, at Citi’s $54 price target, the experts see it trading at a relative discount to the market.

On the other hand, the report continued, while downside at Cummins seems limited, “key end markets losing momentum, plus recent deterioration in EM-specific risk appetite” create a not-so-attractive risk/reward profile.

WABCO: Less Of A Play On North America

Although WABCO is clearly not immune to decelerating global growth, the company does stand out in the machinery group, based on Citi’s HSD top/bottom line growth outlook for 2016 – and a ROIC above 40 percent.

The analysts think “a premium multiple is justified,” but have decided to trim their valuation range (taking their target to $110) to account for lower market and peer multiples, and augmented risk “relating to its longer-term tax liability (cash taxes).”

Shares of all three companies were trading down on Monday afternoon.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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