Cummins Is Buying Parts Maker Meritor. It’s a Deal About EV Trucks.

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The diesel-engine manufacturer

Cummins

disclosed plans to buy the truck parts maker

Meritor

in a deal that shows good things can happen to cheap stocks. The transaction also makes it clear that Cummins knows that heavy-duty trucks need to become more environmental friendly.

Cummins (ticker: CMI) will pay $36.50 in cash for

Meritor

(MTOR). That’s 48% higher than the $24.67 Meritor stock closed at on Friday.

Meritor stock was at $35.25 in premarket trading on Tuesday, leaving it $1.25, or 3.4%, below the deal price. Trading below the deal price can mean that investors don’t expect a bidding war to break out. At a bit more than 3%, the discount is small enough to indicate investors don’t expect any antitrust problems to emerge. It amounts to the return investors need to keep holding stock from now until the time the deal is closed.

Cummins says the transaction should close by the end of 2022.

Cummins stock was down 0.6% in premarket trading. Futures on the

S&P 500
and

Dow Jones Industrial Average
were flat.

“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,” said Cummins CEO Tom Linebarger in the company’s news release.

Buying a traditional truck parts maker might not appear to be motivated by the need to address climate change, but Meritor also makes parts for electric trucks, such as axels that have electric motors integrated into them.

Although Cummins makes a lot of diesel engines, it is also is investing in electric powertrains and hydrogen technology. Hydrogen gas can be burned or used to power fuel cells that generate electricity. And neither process involves emissions of carbon dioxide, the main gas blamed for climate change.

Barron’s wrote positively about Meritor back in October, believing that investors were undervaluing the company’s opportunity to increase the amount of its parts that are used in electric trucks. Investors were treating Meritor like a traditional truck-parts supplier that risked being disrupted by new technologies.

Coming into Tuesday trading, Meritor stock traded for less than 7 times estimated per-share earnings for 2022, while the Cummins deal values it at roughly 10 times. That is closer to the valuations of more-diversified auto-parts suppliers.

BorgWarner

(BWA), for instance, trades for about 10 times estimated 2022 earnings.

The deal might have a positive impact on other small-capitalization auto- and truck-part suppliers with low price-to-earnings ratios.

American Axle & Manufacturing

(AXL) stock, for instance, trades for about 6 times estimated 2022 earnings. Its shares were up about 1% in premarket trading.

Tenneco

(TEN) trades for about 2 times estimated 2022 earnings, but trading volume in the stock was light before the open on Tuesday. The price was unchanged.

Write to Al Root at [email protected]