Daimler Trucks Slashes Outlook: Why Cummins Inc. and PACCAR

Inc. Need to Worry

Freightliner Inspiration Truck. Source: Daimler

Daimler Trucks -- the trucks unit of automotive giant Daimler AG -- slashed its 2016 outlook some days ago, projecting its

sales and operating profits to be “significantly” lower from 2015 levels as

the “situation in major truck markets have changed significantly” in recent weeks.

What Daimler saidNAFTA: No improvement in orders, especially from

key heavy-duty Class 8 segment. HD segment to contract 15% in 2016.

Europe: Strong demand, but intense competition is “influencing market players’ pricing.”

Middle East: Demand hit by low oil prices.Brazil, Indonesia, Turkey: Outlook “continues to

worsen.” Daimler is planning “workforce adjustments” as it expects the Brazilian truck market to contract 20% this year.

Why Daimler’s views matter

Source: PACCAR’s Q1 2016 Investor Presentation

As Daimler is the world’s largest truck manufacturer, its warnings

spell trouble for other players in the trucking industry. Two companies, in

particular, could be headed for tougher days.

PACCAR

PACCAR is among the world’s leading truck manufacturers. It also builds engines.

Image source: Paccar

Why PACCAR could sufferDaimler is bearish on the U.S., which is also PACCAR’s largest and primary end market.

Figures in millions of dollars. Source: Paccar Annual Report 2015

PACCAR’s Q1 numbers say it allTruck deliveries to U.S./Canada: down 24% year over year.Deliveries to “other” markets, including Brazil, Mexico, Australia, and

Asia: down 13% year over year.Total truck revenue: down 11% year over year. Outlook for 2016 Class 8 industry sales: down 10%-21%.

There’s a silver lining thoughPACCAR’s truck deliveries to Europe surged 33% in Q1.Between January and April, PACCAR’s DAF brand

achieved record market share of 16.6% in the heavy-duty European truck market.

PACCAR also raised its full-year outlook for the European trucking industry.

Interestingly, PACCAR appears to be giving Daimler stiff competition in Europe. While

that works in PACCAR’s favor, further contraction of demand in the U.S. and

international markets will likely offset the strength in Europe and send the company’s

sales and profits lower this year.

Cummins Cummins is a leading

manufacturer of diesel engines and related technologies like fuel and filtration systems, and emission solutions. Cummins’ fortunes are closely tied to the trucking industry.

Cummins’ 2017 ISX15 engine. Image source: Company website

Why Cummins could suffer 60% of Cummins’ total

revenues originate in the U.S./Canada – a market Daimler believes has worsened most in recent weeks.

PACCAR is a key customer for Cummins.

Source: Cummins’ Q4 Earnings Presentation

Why Cummins could suffer(cont.) Engines account for

more than 40% of Cummins’ revenue.

70% of its engine sales come from trucking.

CMI’s components and distribution sales are also largely inter-related to its engines business. Source: Cummins’ Q1 Earnings Presentation

While Cummins expects its sales to drop 5%-9% in 2016, deteriorating end

markets could drive its top line even lower. If situation gets worse,

Cummins may also have to align its operations further after having already

reduced its headcount by more than 2,000 in Q4, 2015.

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