Cummins settlement removes overhang but at higher-than-expected cost – Citi

Citi analysts said in a recent note that the Cummins (NYSE:) U.S. Environmental Protection Agency (EPA) settlement removes an overhang for the stock, but it has come at a higher-than-expected cost.

CMI announced Friday that it had reached an agreement in principle on a longstanding issue with the EPA and other regulatory bodies regarding emissions certification and compliance processes on engines used primarily in pickup trucks.

The company expects to record a charge of approximately $2.04 billion in the fourth quarter of 2023 to resolve the issue and related matters.

“While difficult to quantify, the ~$2.04BB charge is roughly double what we found to be ‘consensus; expectations,” said analysts, who have a Buy rating and a $244 price target on the stock. “Roughly $1.9BB of cash payments are expected to be paid in 1H24, which equates to over half of our current projected 2024 free cash flow estimate.”

Citi said it would not rule out some level of increased borrowing such that the company is able to return to a more shareholder-friendly capital allocation stance in 2024.

“In addition, we expect an ATMU split-off to occur sometime in early 2024, which would translate to a ~4% share buyback at current prices,” they added.