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.

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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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