This under-the-radar filtration stock could rally more than 50%, Goldman Sachs says

Published Tue, Jun 20 202312:27 PM EDT

Atmus Filtration is worth buying following its initial public offering, Goldman Sachs said. Analyst Jerry Revich initiated coverage of the filtration stock, whose initial public offering took place in late May, at buy. His $30 price target implies shares could rally 53.7% from Friday's close. He called the company a "global industry leader focused on broadening its portfolio" in a note to clients Tuesday. Revich said the company, which is known for helping trucks and off-highway machines reduce emissions, has a competitive moat due to its product portfolio that spans more than 27,000 part numbers. Altogether, he said Atmus holds between 30% and 90% of the total end market. The company has been able to entrench itself with a broad customer base of auto manufacturers due to its highly engineered products and lower cost per product when compared to total engine cost, he said. He also noted the company has good on-time delivery performance. Atmus has had a long-term compound annual growth rate of 6% since 2006 as part of Cummins, the company it was spun off from. Going forward, it can benefit from emission regulations in countries around the world as the rules require parts like the ones Atmus provides. But Revich noted that Atmus' organic growth has been tied to growth in Cummins' engine segment, which could be challenged with production tracking ahead of demand. However, he said the company can expand outside the core market that's valued at $15 billion into the broader industrial filtration market valued at $45 billion. Revich said Atmus will likely use bolt-on acquisitions to enter this market, which he said is fragmented outside of five major players who account for 20% of market share. And the already existing internal IP should be useful as the filtration technology in the two markets is similar, he said. Despite the potential boost from emission regulations, there is risks associated with the changing automobile landscape. Revich said electrification could be a risk long-term, given Atmus' exposure to combustion engines and the expectation that dollar content per unit will be lower for electric vehicle parts. Given the combustion exposure, Revich said merger and acquisition work is "critical" to his bullish call. Within Atmus' focus area, he said electrification is most sought after in medium-duty trucks, which should see 20% of the market move electric by 2030. But he said that in the next five years, any share loss from increased electric penetration in that market should be offset by share gains from Daimler's decision to outsource medium-duty engines to Cummins, which represents an incremental 100,000 units for Cummins and Atmus. Revich wasn't the only one getting bullish on the stock, with JPMorgan, Bank of America and Wells Fargo also initiating coverage at buy or equivalent ratings. Shares rose more than 7% in Tuesday's session. "In our view, as a standalone company, Atmus will further build on its strengths," Bank of America analyst Andrew Obin said in his upgrade. ATMU 1D mountain Atmus, 1-day — CNBC's Michael Bloom contributed to this report.