Executive Summary / Key Takeaways

• Full Independence as Inflection Point: The completion of Atmus's operational separation from Cummins in Q3 2025 marks a decisive turning point, ending three years of transition costs and enabling full resource deployment toward a four-pillar growth strategy that is already delivering 10.9% revenue growth despite a prolonged freight recession.

• Aftermarket Resilience Defies Cyclical Headwinds: With 86% of revenue from aftermarket sales, Atmus is gaining market share (contributing 3% to 2025 revenue growth) and maintaining pricing power (3% pricing contribution) even as freight activity remains depressed, demonstrating the durable loyalty of its Fleetguard brand and the strategic value of its newly independent distribution network.

• Industrial Expansion via Koch Filter Acquisition: The $450 million Koch Filter acquisition signals Atmus's strategic pivot beyond cyclical vehicle markets into industrial air filtration for HVAC, data centers, and power generation, diversifying revenue streams and leveraging its core media technology in higher-growth, less volatile end markets.

• Margin Expansion and Capital Return Discipline: Adjusted EBITDA margins have expanded 410 basis points since 2022 to a targeted 19.5-20% range in 2025, while the company actively returns capital through a $150 million share repurchase program ($80.7 million executed) and a 10% dividend increase, reflecting strong cash generation and balance sheet flexibility.

• Critical Risks Center on Execution and Macro Volatility: The investment thesis hinges on successfully integrating Koch Filter while navigating tariff volatility (particularly on China and potential Mexico exposure), an extended freight recession expected to persist through mid-2026, and cyclical downturns in U.S. heavy-duty truck markets (down 20-25% in 2025).

Setting the Scene: From Cummins Legacy to Standalone Filtration Leader

Atmus Filtration Technologies, founded in 1958 and incorporated in Delaware in 2022, spent most of its 65-year history as the filtration business of Cummins Inc. (CMI). This heritage built the iconic Fleetguard brand and deep OEM relationships, but it also meant operating as a captive division rather than a focused filtration company. The spin-off process began in April 2022, culminating in the May 2023 IPO where Cummins retained 80.5% ownership. Full independence arrived on March 18, 2024, when Cummins divested its remaining stake, freeing Atmus to pursue its own capital allocation and growth strategy.

The company makes money by designing and manufacturing advanced filtration products—fuel, lube, air, and hydraulic filters—primarily for on-highway commercial vehicles and off-highway equipment in agriculture, construction, mining, and power generation. The business model is built on a powerful aftermarket foundation: 86% of 2024 revenue came from replacement parts, creating a recurring revenue stream that cushions cyclicality in new equipment sales. This mix is the inverse of many industrial suppliers, giving Atmus a defensive core that has proven resilient through a three-year freight recession.

Atmus operates as a single reportable segment but strategically targets four growth pillars: expanding first-fit penetration with regional OEMs, accelerating aftermarket share gains, transforming its supply chain for direct control, and diversifying into industrial filtration markets. The company sits in a specialized but critical niche within the broader filtration industry, competing against diversified giants like Donaldson (DCI), Parker Hannifin (PH), and 3M (MMM) while maintaining leadership in heavy-duty vehicle filtration through brand, technology, and distribution.

Industry structure favors specialists with strong aftermarket positions. The heavy-duty filtration aftermarket grows at roughly 4% annually, driven by equipment aging and regulatory requirements, but faces disruption from electrification trends that reduce filtration needs. Atmus's response is twofold: deepen share in the core diesel-powered installed base while expanding into industrial applications where filtration remains essential regardless of powertrain.

Technology, Products, and Strategic Differentiation

Atmus's core competitive advantage rests on proprietary filtration media technology, most notably the NanoNet line. The Q1 2025 launch of next-generation NanoNet N3 media enables more compact filter designs with superior service life across harsh fuel environments. This technology provides tangible benefits: longer service intervals reduce maintenance costs for fleet operators, while compact designs save valuable under-hood space for OEMs. The company opened a new media manufacturing facility in Mado, South Korea, in Q1 2025 to economically produce NanoNet Plus multilayer media, increasing capacity for existing nanofiber lines and supporting future industrial applications.

The Fleetguard brand represents a powerful moat built over decades as the specified filtration solution for Cummins engines. This brand equity translates into pricing power and customer loyalty in the aftermarket, where fleet operators trust Fleetguard to protect high-value assets. The brand's strength is evident in Atmus's ability to implement 3% pricing increases in 2025 despite soft market conditions, with management explicitly targeting price/cost neutrality on tariffs through proactive adjustments.

Supply chain transformation represents the third pillar of differentiation. By Q3 2025, Atmus completed the transition of seven distribution centers from Cummins control, with the final South Africa facility coming under direct management in Q2 2025. The Belgian warehouse, the most complex transition, reached normalized operating levels by Q2 2025 after facing higher-than-anticipated costs. This direct control over distribution allows Atmus to optimize inventory placement, improve on-shelf availability, and capture data on customer demand patterns—creating a flywheel effect where better availability drives share gains, which in turn justifies further distribution investment.

The fourth pillar, industrial filtration expansion, is accelerating through M&A. The Koch Filter acquisition brings established positions in industrial air filtration for growing end markets like data centers and power generation. While Atmus's organic industrial efforts remain in infancy, Koch provides immediate scale and cross-selling opportunities for NanoNet media technology into non-vehicle applications, diversifying revenue away from cyclical transportation markets.

Financial Performance & Segment Dynamics

Q3 2025 results demonstrate the strategy's effectiveness. Revenue grew 10.9% to $447.7 million, driven by $25.8 million in favorable volumes, $14.9 million in pricing, and $3.3 million in currency benefits. The volume growth of 6% consisted of 8 percentage points from share gains offset by 2 percentage points of market headwinds—meaning Atmus is significantly outperforming its end markets. This outperformance was broad-based but received a one-time boost from Stellantis (STLA) Model Year '25 Ram product launch stocking, which contributed to both first-fit and aftermarket sales in Q3 but will not repeat.

Gross margin expanded by $18.1 million to $129.4 million, with favorable pricing contributing $14.9 million and volumes adding $9 million. Manufacturing efficiencies contributed $6.2 million, while one-time separation costs decreased by $2.5 million. These gains were partially offset by $14.5 million in higher logistics costs, reflecting the distribution network transition. The net result is a gross margin of 28.9%, supporting management's confidence in the 19.5-20% adjusted EBITDA margin target for 2025.

Geographic performance reveals a tale of two markets. U.S. sales surged 17.2% in Q3 2025 to $223.7 million, driven by share gains and the Stellantis launch. International sales grew a modest 5.2% to $224 million, with softness in China and Europe offsetting growth in India. This divergence highlights Atmus's ability to win in its core U.S. market while facing headwinds abroad, a dynamic expected to persist as the company cautiously manages its China exposure (less than 2% of U.S. sales sourced from China) and awaits infrastructure-driven growth in India.

The product mix shows strength in fuel filtration, up 18.1% in Q3, reflecting new OEM wins and market share gains. Lube and air filtration grew 12.1% and 9.2% respectively, while the "Other" category declined 4.1%, likely due to cyclical softness in hydraulic applications for off-highway equipment. This mix shift toward higher-value fuel filtration supports margin expansion.

Capital allocation demonstrates disciplined balance. Atmus generated $155.2 million in operating cash flow through nine months of 2025, up $69.8 million year-over-year due to lower working capital needs and higher net income. The company repurchased $30 million of stock in Q3, bringing year-to-date buybacks to $61 million against the $150 million authorization, while also increasing the quarterly dividend 10% to $0.055 per share. With $218.3 million in cash and full $400 million revolver availability, total liquidity of $618.3 million and net debt to EBITDA of just 1.0x provides ample firepower for the Koch acquisition and future M&A.

Outlook, Management Guidance, and Execution Risk

Management's 2025 guidance reflects confidence tempered by market realism. Revenue is now expected at $1.72-1.745 billion, representing 3-4.5% growth, with adjusted EBITDA margins of 19.5-20% and EPS of $2.50-2.65. This represents an upward revision from earlier guidance, driven by stronger-than-expected share gains now projected to contribute 3% of revenue growth versus the prior 2% expectation.

The guidance framework reveals key assumptions. Pricing is expected to contribute 3% to revenue, comprising base pricing actions and tariff pass-throughs, with management explicitly assuming continuation of USMCA exemptions for Mexican-sourced products. The U.S. heavy and medium-duty truck markets are expected to decline 20-25% in 2025, a deterioration from earlier forecasts of 15-25% declines, reflecting ongoing regulatory uncertainty around 2027 emissions standards and soft economic conditions.

Aftermarket conditions remain the critical variable. Management anticipates freight activity will be "flattish year-over-year" and persist through the first half of 2026, marking nearly four years of depressed conditions. The company is questioning whether traditional freight indicators remain relevant given the duration of the downturn, suggesting structural shifts may be obscuring recovery signals. This uncertainty makes Atmus's ability to generate 3% growth from share gains even more impressive and essential to hitting targets.

Execution risks center on three areas. First, the Koch Filter integration must deliver on synergy expectations while not distracting from core operations. Second, the distribution network must sustain normalized performance after the complex Belgian transition, with management emphasizing that improved availability creates a "flywheel effect" for growth. Third, tariff mitigation strategies—leveraging USMCA certifications, foreign trade zones, and supply chain rerouting—must maintain price/cost neutrality as the trade policy landscape evolves.

Management's tone suggests a pivot from separation to acceleration. CEO Stephanie Disher emphasized that completing the separation "enables us to redeploy resources, time and energy to focus on growth," with over 300 IT projects and seven distribution centers now under direct control. The organization is "energized to realize our full potential," indicating a cultural shift toward agility and growth investment.

Risks and Asymmetries

The most material risk is the persistence of the freight recession beyond mid-2026. If aftermarket demand remains depressed longer than expected, even aggressive share gains may not offset market volume declines, pressuring revenue growth and margin leverage. Management's own commentary questions whether freight indicators are still valid, creating uncertainty around the timing and magnitude of any recovery.

Tariff volatility presents a direct margin threat. While Atmus has implemented swift pricing actions to offset China tariffs (affecting less than 2% of U.S. sales), potential reductions or eliminations of USMCA exemptions for Mexican-sourced products could create a larger impact than the China tariffs. Management estimates the Mexico exposure could be "larger than that China impact" if exemptions are lost, though current certification levels mitigate this risk. The company's ability to remain price/cost neutral depends on continued agility in pricing and successful mitigation through foreign trade zones and supply chain adjustments.

OEM market cyclicality remains a structural vulnerability. With 14% of revenue in first-fit applications, the projected 20-25% decline in U.S. heavy and medium-duty markets creates a headwind that share gains and pricing cannot fully offset. The Stellantis launch provided a one-time boost in Q3 that will not repeat, making underlying first-fit trends weaker than reported growth suggests. Extended weakness could delay new product launches and reduce content per vehicle.

The Koch Filter acquisition execution risk is significant at $450 million, representing roughly 25% of Atmus's current market cap. While the strategic rationale is sound—diversifying into industrial air filtration with a proven platform—integration challenges, customer retention, and achieving projected synergies could pressure margins and distract management from core operations. The industrial filtration market has different competitive dynamics and customer relationships that may not leverage Atmus's vehicle filtration expertise as seamlessly as expected.

Concentration risk persists despite independence. While the Cummins relationship remains strong, with Atmus continuing to supply first-fit filters for Cummins engines, any shift in Cummins's sourcing strategy or market share could impact Atmus's first-fit business. The aftermarket business is more diversified, but the brand heritage remains tied to Cummins engines, potentially limiting appeal in non-Cummins applications.

Valuation Context

Trading at $52.25 per share, Atmus commands a market capitalization of $4.29 billion and an enterprise value of $4.69 billion. The stock trades at 21.9x trailing earnings and 14.5x EV/EBITDA, a discount to filtration peers Donaldson (28.8x P/E, 16.7x EV/EBITDA) and Parker Hannifin (31.4x P/E, 23.3x EV/EBITDA), but a premium to 3M (26.8x P/E, 15.8x EV/EBITDA). This relative valuation appears justified by Atmus's superior growth trajectory—10.9% in Q3 versus Donaldson's 3.9% and 3M's modest single-digit growth—and its exceptional return on equity of 71.5% versus Donaldson's 25.0% and Parker's 27.3%.

Cash flow metrics reinforce the quality of the business. Atmus trades at 24.5x operating cash flow and 33.6x free cash flow, with a free cash flow yield of approximately 3.0%. While not inexpensive, these multiples are supported by strong margin expansion, with adjusted EBITDA margins having improved 410 basis points since 2022 to a targeted 19.5-20% range. The company's net debt to EBITDA ratio of 1.0x provides balance sheet flexibility, while the 0.42% dividend yield and active share repurchase program demonstrate commitment to capital returns.

Relative to its own history, Atmus is trading at a premium to its early post-IPO multiples, but this reflects the completion of separation costs and the pivot to growth. The EV/Revenue multiple of 2.7x sits below Donaldson's 3.1x and well below Parker Hannifin's 6.1x, suggesting the market has not yet fully priced the industrial diversification strategy. If Koch Filter integration delivers expected synergies and industrial markets provide more stable growth, multiple expansion could follow.

The valuation leaves little room for execution missteps. Any slippage in margin targets, a longer-than-expected freight recession, or tariff headwinds that pressure price/cost neutrality could lead to multiple compression. Conversely, successful industrial expansion and sustained share gains in a weak market could justify current valuations and provide upside as the company demonstrates it can compound earnings through the cycle.

Conclusion

Atmus Filtration has emerged from its Cummins heritage as a focused, independent filtration leader with a compelling growth strategy built on aftermarket resilience, technological differentiation, and industrial expansion. The completion of operational separation in Q3 2025 marks a clear inflection point, enabling full resource deployment toward a four-pillar strategy that is already delivering 10.9% revenue growth and 410 basis points of margin expansion despite severe end-market headwinds.

The investment thesis rests on two critical factors: the durability of Fleetguard brand-driven share gains in a depressed freight environment, and successful execution of the Koch Filter acquisition to diversify into industrial markets. Management's ability to maintain pricing power and target price/cost neutrality amid tariff volatility demonstrates operational agility, while the strong balance sheet and active capital return program provide downside protection.

The primary risks—extended freight recession, tariff policy shifts, and OEM cyclicality—are real but appear manageable given the company's demonstrated ability to outperform markets and mitigate costs. For investors, the key variable is whether Atmus can sustain its share gain momentum and integrate Koch Filter while redeploying resources from separation to growth. If execution holds, the company is positioned to compound earnings and expand its multiple as it proves the industrial diversification strategy can reduce cyclicality and open new growth avenues.