Off-Road vs. On-Road: Cummins Lowers Guidance
- Little Relevance to PCAR, North American Truck OEMs: Investors already have North American truck orders and already know that they are anemic. The Cummins’ pre-announcement provides little new information on this market. North American Class 8 build schedules are already expected to drop.
- Mining Equipment Slowdown Confirmation: Cummins specifically cited mining equipment as an area of weakness. Cummins sells high value engines to off-road markets, mining equipment among them. Komatsu, for example, is a major Cummins customer.
- Class 8 Less Relevant to CMI: Cummins has diversified away from heavy-duty engines and North America. Only around 40% of the company’s sales are in the U.S. Further, global heavy-duty on-road engine, distribution and parts sales are probably less than 1/3 of CMI’s total sales, with the North American heavy-duty market a fraction of that.
- Mix Shift: Power generation and off-road vehicles (particularly with Tier IV) have become bigger parts of CMI’s mix. Medium-duty and light-duty engines, in which Paccar has little or no presence, are significant markets for Cummins but do not have the same positive cyclical drivers as the Class 8 market (e.g. a record old fleet).
- Brazil & China: Cummins noted weaker than expected activity in China and had already discussed weakness in Brazil with 2Q results. While a negative economic signal, Paccar is not currently selling in those markets.
- Margin Pressure: We expect Cummins to struggle with the transition from adding emissions controls for on-road trucks, where efficiency is paramount, to off-road vehicles, where efficiency is less relevant. This transition, along with the challenge of being a supplier to highly consolidated industries, may contribute to weaker margins.
- CAT, Komatsu, and Weak Industrial Activity: The lower guidance is the latest sign that global industrial activity has weakened, particularly in key emerging markets. We expect the pre-announcement to impact stocks like CAT and KMTUY, as expectations have yet to fully readjust for these companies, in our view. While PCAR has reacted in aftermarket trading, there is little new information in the Cummins release relevant to Paccar.