A diesel engine at a Cummins plant in Indiana.
Luke Sharrett/Bloomberg
It turns out that earnings really do matter—even for a once-hot hydrogen play like Plug Power.
Two brokers lowered their stock-price targets for Plug Power, a developer of hydrogen-based technology that could power the emissions-free trucks of the future. Shares of Cummins, the maker of diesel engines for trucks, caught an upgrade Monday from Bank of America.
The moves are a metaphor for the entire market in 2021. Investors are becoming more enthusiastic about stocks that benefit from an improving economy, and less upbeat on those that promise spectacular growth, eventually.
Bank of America analyst Ross Gilardi upgraded Cummins (ticker: CMI ) stock to Buy from Hold, setting a target of $325 a share for the price, up from $295. Coming into Monday’s trading, shares were up about 17% year to date at $265.67, but Gilardi believes they can keep rising as the economy improves. He projects Cummins earnings will march higher for years and average about $20 a share over the next economic cycle. That would leave shares trading at roughly 13 times today’s level.
Gilardi estimates Cummins will earn about $16.35 a share in 2021. At the current price, the shares are trading at about 16 times that amount.
Cummins stock was up about 1% in early trading Monday. The S&P 500 and Dow Jones Industrial Average were both down about 0.3%.
While Cummins was being upgraded, Plug Power (PLUG) stock was getting its price target cut. B. Riley analyst Christopher Souther lowered his target price to $50 from $70 a share and Barclays analyst Moses Sutton reduced his call to $24 from $28.
Souther rates Plug stock at Buy, while Sutton has it at Sell. Plug stock was up despite the cuts, rising about 2% to $25.07. The shares have fallen about 57% over the past three months, leaving them down about 29% year to date, partly because Plug just completed a financial restatement to address internal accounting problems.
In 2020, the shares rose 973% as investors became more excited about the prospects for hydrogen-based transportation technologies. Hydrogen doesn’t emit any carbon dioxide—the main gas blamed for global warming—when burned or used in a fuel cell to generate electricity. Hydrogen technologies are being adopted to reduce carbon emissions, but the cost of the gas still makes that a relatively expensive option.
Cummins shares, meanwhile, rose about 27% in 2020. Covid-19 hit demand for industrial goods, reducing the profits of manufacturers—Cummins earned about $15 a share in 2019 and about $12 a share in 2020—so investors shifted their eyes to the future. Plug isn’t profitable yet and isn’t expected to be for years to come, but the pandemic didn’t affect its business prospects as it did for many traditional industrial firms.
Now that the economy is reopening, investors are feeling better about cyclical stocks. The consensus view on Wall Street is that Cummins will earn about $15.70 a share in 2021 and $18.18 in 2022. Gilardi sees peak earning potential of $25 a share in coming years.
Investors have been a little quicker than Wall Street to move out of stocks like Plug, with earning coming down the road, and into stocks like Cummins.
Only about 44% of analysts covering Cummins shares rate them at Buy, while the average Buy-rating ratio for stocks in the S&P 500 is roughly 55%. The average price target among analysts is about $290 a share, about 9% above recent levels.
More than 60% of analysts covering Plug stock rate shares at Buy. The average analyst price target is $48, up about 100% from recent levels. The implied gain is huge, but Plug is a riskier stock. It needs higher potential returns to keep investors interested.
The group of analysts covering Plug is also different than those who cover Cummins. Plug analysts, for the most part, cover renewable technologies. Cummins analysts handle traditional machinery stocks.
Analysts’ view that Plug stock could double probably won’t be enough to pull Plug out of its recent funk. That might take actual earnings.
Write to Al Root at [email protected]
