Update September 12. When on September 6 Volkswagen announced that it would take a 16.6% stake in Navistar International (NAV) for $256 million, it sent competitors in the truck market slipping lower. Shares of Cummins (CMI) fell 2.6% from September 8 to September 9 and shares of Paccar (PCAR) dropped 2.4% on that same day.
Now Volkswagen definitely has ambitions in the truck space–in the last two years the German company has created a new truck unit by combining Swedish truck supplier Scania with German truck maker MAN. And the deal is definitely a plus for Navistar, which will see cost savings from the tie up and which will be able to benefit from Volkswagen’s expertise in truck development. (And the deal also eases doubts about Navistar’s ability to ride out the bottom of the current truck cycle. On September 8 the company reported a third quarter loss of 42 cents a share on revenue of just $2.09 billion, about 18% lower than the year earlier quarter.
But when it comes to Cummins, a member of my 50 Stocks for the long-term and my Dividend portfolios, I think the worries are overstated. Cummins makes truck engines and Navistar is a major customer with Navistar accounting for 5% to 10% of Cummins sales, according to Morningstar. Navistar became a big Cummins customer after giving up on its efforts to produce its own truck engines in the face of Cummins’ technology lead and big financial commitment to research and development. Based on the results of Paccar’s decision to go into competition with Cummins back in 2010 in order to source its own truck engines, Morningstar calculates that it will take until 2025 for the Navistar-Volkswagen partnership to replace half of Navistar’s current purchases from Cummins with its own engines–if the two companies decide that sourcing their own truck engines is a high priority use of capital. That means Cummins could lose 3% to 5% of current sales to Navistar by 2025. That’s a change in sales dwarfed by the gains in revenue at Cummins as the truck cycle bottoms over the next year or two.
There are certainly things to worry about with Cummins–the possibility that the bottom of the truck cycle will be more drawn out that now expected is the major one–but I wouldn’t put the effects of this deal in the category of a big worry.
Cummins shares climbed 1.85% today to $118.97, almost back to the $119.88 before this news. The shares pay a dividend yield of 3.51%