Cummins, Joy Global Shareholders Destroyed By Bank Of America Downgrades

• Shares of Joy Global Inc. JOY and Cummins Inc. CMI have declined steadily in 2015 and are down 67 percent and 31 percent, respectively, year-to-date.
• BofA Merrill Lynch’s Ross Gilardi downgraded the rating on Joy Global from Neutral to Underperform and on Cummins from Buy to Underperform.
• Rising risk of a further devaluation in the Chinese currency and poor industry fundamentals are expected to restrict the performance of the two companies.

Joy Global: No Bottom In Sight

Analyst Ross Gilardi reduced the price objective for Joy Global from $21 to $10.

Joy Global’s shares are down 68 percent year-to-date, versus a 12 percent decline in the SPX Machinery Index. The company’s future performance is expected to be weak, given the bleak outlook for the global coal and industrial metal segments, Gilardi added.

A further devaluation of up to 10 percent is expected in the Chinese RMB in 2016. The analyst stated that such a scenario would be bearish for emerging markets, commodities, the Machinery segment and Joy Global. The company is likely to first reduce its dividend and then eliminate it totally.

Although the company is diversifying away from coal end markets, coal contributes nearly 55 percent of its LTM revenue. Gilardi added that the outlook for coal is bleak.

The oversupply in the global coal industry can only be fixed by supply rationalization. The BofA Merrill Lynch report noted that this is not expected to play out well for Joy Global in the medium term. The EPS estimates for 2016-17 have been reduced by 33-60 percent.

Cummins: No Visibility On Trough EPS

Gilardi reduced the price objective for Cummins from $115 to $90.

An expected further decline in the Chinese currency and weak US truck market fundamentals are expected to have a negative impact on the company’s performance in the future, the BofA Merrill Lynch report mentioned.

Gilardi expects the decline in the US truck market to come faster than the market had expected, given the soft retail environment, slippage in spot freight pricing and rising cancellations.

“We’re now assuming a 17% decline in NA Class 8 production to 270k units in 2016, which will still leave us above replacement demand, and pave the way for another down year in 2017,” the analyst added.

Although Cummins’ Components segment has performed well for the past several years, its projected margins of 14.3 percent in 2015 appear to be unsustainable, Gilardi mentioned while adding that fewer emission standard charges are expected to curtail revenue growth.

“We see Components margin retrenching to 12.0% by 2017 on 5-8% annual revenue declines,” the report stated. The EPS estimates for FY16 and FY17 have been reduced by 9-13 percent to $7.40 and $7.05, respectively.