Cummins, Inc. (CMI) Slides on Prospect of Losing Navistar to Volkswagen

Shares of Columbus, Indiana, based Cummins, Inc. (CMI) fell on Tuesday, against the backdrop of a generally higher day in stocks overall. Cummin's stock was down 7.31%, losing $9.22 per share, to close at $116.51, on volume of 5.68 million shares. Investors had a negative reaction to news that Volkswagen has taken an equity stake in Navistar, one of the major customers for engines built by Cummins.

Founded in 1919, Cummins, Inc. manufactures diesel engines.
It designs, manufactures, markets, distributes and services diesel and natural gas engines, as well as electric power generation systems and engine-related component products, including filtration, exhaust after-treatment, fuel systems, controls, air handling and power generation systems. The company sells its products to original equipment manufacturers, distributors and other customers worldwide. It provides engines for heavy- and medium-duty trucks, buses, recreational vehicles, light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets.
Cummins, Inc. (CMI) Slides on Prospect of Losing Navistar to Volkswagen
Image by Life-Of-Pix / Pixabay
The company's stock trades on the New York Stock Exchange.

Cummins stock fell on news announced on Tuesday that Volkswagen AG (VLKAY) would acquire a 16.6% stake in Navistar International Corporation (NAV), one of the major clients for Cummins engines. Volkswagen will also appoint two directors to the Navistar Board as part of a strategic alliance. The concern is that Cummins will eventually lose the engine business it currently provides to Navistar, as Volkswagen moves to replace Cummins as Navistar's primary engine supplier.

The Navistar-Volkswagen partnership also calls into question the future of Cummins business. Cummins operates as an independent engine supplier in the truck manufacturing industry that may move increasingly toward the creation of in-house engine manufacture. Cummins may have to develop a new business model in order to retain market share in an industry dominated by in-house engine production.

Volkswagen and Navistar announced their pending partnership Tuesday morning before the stock market opened. Navistar expects that the partnership will reduce expenses by $500 million over the first five years. By then the arrangement will be fully developed, and the company expects to reduce expenses by $200 million per year. The partnership has been described as a procurement joint venture that will include technology sharing centered on powertrain design.

"We are very pleased to partner with a global leader who shares our view of the world, in an alliance that will deliver multiple benefits and is consistent with our open-integration strategy," said Navistar President and CEO, Troy Clarke. "Starting in the near term, this alliance will benefit our purchasing operations through global scope and scale. Over the longer term, it is intended to expand the technology options we are able to offer our customers by leveraging the best of both companies and enabling Navistar to deliver enhanced uptime."

Navistar's stock price surged 40.65%, rising $5.72 per share to close at $19.79, on volume of 16,587,105 shares. Volkswagen's stock price close up 0.58%, rising 17 cents per share, to close at $29.52, on volume of 92,695 shares.

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Published on Sep 7, 2016
By Kevin Mercadante

Copyrighted 2020. Content published with author's permission.

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