BUSINESS
Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power. The company offers diesel and natural gas-powered engines under the Cummins and other customer brands for the heavy and medium-duty truck, bus, recreational vehicle, light-duty automotive, construction, mining, marine, rail, oil and gas, defense, and agricultural markets; and offers new parts and services, as well as remanufactured parts and engines. It also provides power generation systems, high-horsepower engines, heavy and medium duty engines, application engineering services, custom-designed assemblies, retail and wholesale aftermarket parts, and in-shop and field-based repair services.
INVESTMENT RATING
CMI is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.
Cummins has a current Value Trend Rating of C (Low Neutral).
This rating combines consistent signals from two proprietary PTR measures of a stock’s attractiveness. Cummins has a slightly negative Appreciation Score of 32 and a neutral Power Rating of 56, producing the Low Neutral Value Trend Rating.
Cummins’ stock is selling above targeted value. The current stock price of $302.30 compares to targeted value 12 months forward of $269.
This moderately low appreciation potential results in an appreciation score of 32 (68% of the universe has greater appreciation potential.)
Cummins has a Power Rating of 56. (This neutral Power Rating indicates that CMI’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been favorable. Offsetting factors are earnings estimate behavior for CMI has been slightly negative recently; and the Engines and Turbines comparison group is in an extremely unfavorable position currently.
INVESTMENT PROFILE
Cummins’ financial strength is high. Financial strength rating is 78.
Cummins’ performance and resulting investment profile demonstrate it is comparable to the S&P 500 Composite taken as a whole. All factors are relative strengths. Cummins’ valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. CMI has normal market capitalization.
CURRENT SIGNALS
Cummins’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
Cummins’ current technical position is very strong. The stock price is in a 5.4 month up move. The stock has appreciated 39.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
The stock is currently rated C.
Cummins Inc. (NYSE: CMI) stock closed at $302.30 on 4/10/24 after a slight gain of 0.09%. However, exceptionally low trading volume at 23% of normal accompanied the advance. The stock has risen 2.2% during the last week and has been strong relative to the market over the last nine months.
CASH FLOW
In 2023, Cummins generated a slight increase in cash of +$168 million (+7%). Sources of cash were slightly larger than uses. Cash generated from 2023 EBITDA totaled +$4,398 million. Non-operating uses consumed -$1,479 million (-34% of EBITDA). Cash taxes consumed -$905 million (-21% of EBITDA). Withdrawal of investment from the business totaled +$544 million (+12% of EBITDA). On a net basis, debt investors pulled out -$1,530 million (-35% of EBITDA) while equity investors withdrew -$860 million (-20% of EBITDA).
Cummins’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Cummins Peer Group. (Since 2020 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Cummins was in the top quartile. Currently, Cummins is below median at -34% of EBITDA (-$1,479 million).
Cummins’ Cash Taxes, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by a similar trend for the Cummins Peer Group. In most years, Cummins was in the third quartile and lower quartile. Currently, Cummins is lower quartile at -21% of EBITDA (-$905 million).
Cummins’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cummins Peer Group. In most years, Cummins was in the third quartile and second quartile. Currently, Cummins is at the upper quartile at +12% of EBITDA (+$544 million).
Cummins’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Cummins Peer Group. In most years, Cummins was in the second quartile and top quartile. Currently, Cummins is lower quartile at -35% of EBITDA (-$1,530 million).
Cummins’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cummins Peer Group. (Since 2021 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Cummins was in the lower quartile and third quartile. Currently, Cummins is upper quartile at -20% of EBITDA (-$860 million).
Cummins’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cummins Peer Group. (Since 2021 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Cummins was in the third quartile and lower quartile. Currently, Cummins is slightly below median at +4% of EBITDA (+$168 million).
Cummins’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Cummins Peer Group as well. (Since 2020 Cash, %Revenue has experienced a sharp decline.) In most years, Cummins was in the second quartile and third quartile. Currently, Cummins is at median at +8%.
PROFITABILITY
Cummins’ return on equity has eroded very significantly since 2014. The current level of 8.3% is at the low for the period and is -61.0% from the high.
This very significant erosion was due to very strong negative trend in pretax operating return offset by strong positive trend in non-operating factors.
The productivity of Cummins’ assets declined over the full period 2014-2023: asset turnover has suffered a strong overall downtrend although it experienced a very sharp recovery after the 2020 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2023 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
Cummins’ return on equity is slightly below median (8.3%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is below median (5.1%) reflecting asset turnover that is at the upper quartile (1.06X) and below median pretax margin (4.8%).
Tax “keep” rate (income tax management) is lower quartile (45.2%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at the upper quartile (3.62X).
GROWTH RATES
There are no significant differences between Cummins’ longer term growth and growth in recent years.
Cummins’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 9.1% per year. (More recently it has been 16.3%.)
Total asset growth has been 11.8% per year.
Annual E.P.S. growth has been 5.1% per year.
Equity growth has been 5.1% per year.
Cummins’ consensus growth rate forecast (average of Wall Street analysts) is 23.0% — substantially above the average of the historical growth measures.
Relative to the Cummins Peer Group, Cummins’ historical growth measures are erratic. Total asset growth (11.8%) has been upper quartile. Revenue growth (9.1%) has been at the upper quartile. E.P.S. growth (5.1%) has been slightly above median. Equity growth (5.1%) has been at median.
Consensus growth forecast (23.0%) is upper quartile.
PRICE HISTORY
Over the full time period, Cummins’ stock price performance has been variable and slightly below market. Between June, 2013 and April, 2024, Cummins’ stock price rose +179%; relative to the market, this was a -13% loss. Significant price move during the period: 1) December, 2015 – January, 2018: +114%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 13.7% is slightly above median relative to the S&P 500 Composite.
In addition to being slightly above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 13.7% is at median relative to Cummins Inc. Peer Group.
Current 5-year total return performance of 14.9% is above median relative to the S&P 500 Composite.
Through February, 2024, with above median current 5-year total return of 14.9% relative to S&P 500 Composite, Cummins’ total return performance is above median relative to Cummins Inc. Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CMI’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is above median. Ratio of enterprise value/assets is slightly below median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Cummins Peer Group, CMI’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/assets is at median. Ratio of enterprise value/revenue is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is near the lower quartile.
Cummins has a major value gap compared to median valuation. For CMI to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 1.47X to 0.98X. If CMI’s ratio of enterprise value/revenue were to decline to 0.98X, its stock price would be lower by $-117 to $185.
For CMI to achieve upper quartile valuation relative to the Cummins Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.47X to 2.18X. If CMI’s ratio of enterprise value/revenue were to rise to 2.18X, its stock price would increase by $170 from the current level of $302.
VALUE TARGETS
CMI is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to exceed the cost of capital.
Cummins’ current Price Target of $282 represents a -7% change from the current price of $302.30.
This moderately low appreciation potential results in an appreciation score of 32 (68% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 32, the neutral Power Rating of 56 contributes to an Value Trend Rating of C.
Cummins’ current Price Target is $282 (+4% from the 2023 Target of $271 but -7% from the 04/10/24 price of $302.30). This plateau in the Target is the result of a +6% increase in the equity base and a -2% decrease in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
PTR’s return on equity forecast is 32.1% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly above the 2016 low of 20%.
PTR’s growth forecast is 5.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is below the 2015 peak of 9%.
PTR’s cost of equity forecast is 12.7% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is above the 2016 low of 9.6%.
At Cummins’ current price of $302.30, investors are placing a positive value of $156 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 27.0% versus a cost of equity of 13.3%.
PTR’s 2025 Price Target of $282 is based on these forecasts and reflects an estimated value of existing assets of $186 and a value of future investments of $96.
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