Diesel truck specialist Cummins (NYSE: CMI) is making headlines after offering to acquire Meritor (NYSE: MTOR) for approximately $3.7bn, subject to shareholder approval.
The offer from Cummins amounts to $36.50 in cash per Meritor share, including assumed debt and net of acquired cash. This sent Meritor’s share price up by 43.78% on Tuesday, while Cummins’s shares dropped by 1.83%.
Why is CMI Buying MTOR?
CMI is a truck engine maker with products including diesel, natural gas, electric and hybrid powertrains. Additionally, the company produces powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems and air handling systems.
The key reason behind the acquisition is Cummins’s desire to improve its offerings catered for hybrid and green vehicles. The company’s reliance on heavy duty diesel trucks is likely unsustainable, so investing in a company which produces EV optimized drive axle, brakes and shifting software looks like a savvy move.
Cummins chairman and CEO, Tom Linebarger, said:
“The acquisition of Meritor is an important milestone for Cummins. Meritor is an industry leader, and the addition of their complementary strengths will help us address one of the most critical technology challenges of our age: developing economically viable zero carbon solutions for commercial and industrial applications.
“Climate change is the existential crisis of our time and this acquisition accelerates our ability to address it. Our customers need economically viable decarbonized solutions."
What is Meritor Inc?
Meritor Inc makes vehicle components for military suppliers, trucks, and trailers. It specialises in products such as axles, drivelines, brakes, and suspension systems. Its customers are primarily medium- and heavy-duty truck OEMs, specialty vehicle manufacturers, certain aftermarkets, and trailer producers.
The company, which is based in Troy, Michigan, has existed for more than a century, having first been formed as Timken Detroit Axle in 1909. Meritor Inc now employs more than 8,600 people at its facilities in the Americas, Europe, Asia and Australasia.
How Does Cummins Make Money?
For its part, Cummins dwarfs Meritor. The company has almost 60,000 employees, who work across its engine, power systems, components and distribution business units.
Cummins sells to a diverse range of customers in 190 countries. These customers include those who plow fields, as well as those who mine the earth or run data centers. The company serves these customers online, through a network of company-owned and independent distributor locations, and through thousands of dealer locations worldwide.
With this business model, Cummins made $19.8bn in sales in 2020, making a profit of $1.8bn.
Cummins Financial Overview
P/BV: 3.6
P/S: 1.3
Forward P/E: 12.47
Market Cap: $31.06bn
Cash and Cash Equivalents: $2.59bn
Total Current Liabilities: $6.8bn
Total Liabilities: $14.1bn
Who are Cummins’s Competitors?
Cummins’s competitors and comparable companies include:
Generac Holdings (NYSE: GNRC)
Caterpillar Inc (NYSE: CAT)
Rockwell Automation (NYSE: ROK)
Deere & Company (NYSE: DE)
Risks of Investing in Cummins
First it is key to note that the company’s operations are dependent on good prices and availability of steel, components, labor, transportation costs and energy. As such, volatility in the pricing of any of these key materials or supplies could cause serious difficulties for Cummins.
The company has also previously warned that mandatory vaccination requirements from the US government for workers at companies which are fulfilling federal contracts could lead to some worker attrition.
Is Cummins a Good Investment?
Though Cummins’s bid for Meritor Inc is at a premium to the company’s share price, it could still be picking the company up on the cheap. When gauged against its EPS, Meritor’s share price is lower than a number of its competitors, which means Cummins could have snapped up a good deal.
Regardless, purchasing the company puts Cummins in a better position to negotiate the increasing demand for electric and hybrid vehicles, which will undoubtedly intensify over the coming years.
Looking beyond the proposed Meritor acquisition, the company’s share price has dropped by 2.48% across the year to date, though some of this decline is an expected part of making an acquisition offer.
Even with the decline in share price, the company is weathering the first few months of a very volatile 2022 better than most of its competitors. It had enjoyed steady share price growth until March 2021, but has gradually declined since.
Most analysts currently have a ‘hold’ or ‘buy’ recommendation for the stock, suggesting that it is expected to perform roughly in line with the market or perhaps a smidge better. The acquisition of Meritor looks to be a positive sign however, and could go some way to rejuvenating the company’s share price growth in the medium to long term.