Cummins (NYSE: CMI)
QVI Research Report | Updated Coverage | June 2023
Summary
Trusted truck diesel engine manufacturer, Cummins, will leverage its reputation for customer-driven responsibility and lead the industry transition to low, if not emissions-free, transport.
In mid-2022, Cummins caught my attention for its impressive business model, and QVI added the stock to the Expanded Portfolio at a 22% discount to the current price.
Despite attractive shareholder yields, solid fundamentals, reasonable valuations, and below-average downside risks, the market continues to underbuy the stock.
However, QVI reiterates its rating of the legendary construction machinery and heavy transportation equipment player in this updated research report.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on June 26, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Cummins Value Proposition
QVI Research Report's value proposition section provides a brief synopsis of the company's business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company's products or services to its customers compared to the industry, including the stock's historical performance vs. the sector and market.
Cummins, Inc. (NYSE: CMI) is a dividend-paying mid-cap stock in the industrials sector's construction machinery and heavy transportation equipment industry. CMI was added to the QVI Expanded Portfolio on May 24, 2022, at a split and dividend-adjusted $191.32 a share.
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. It offers new parts, services, 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.
In addition, the company offers emission solutions; turbochargers; air and fuel filters, fuel water separators, lube and hydraulic filters, coolants, fuel additives, and other filtration systems; and electronic control modules, sensors, and supporting software, as well as new, replacement, and remanufactured fuel systems. Further, it provides automated transmissions; standby and prime power generators, controls, paralleling systems, and transfer switches, as well as A/C generator/alternator products under the Stamford and AVK brands; and electrified power systems with components and subsystems, including battery, fuel cell, and hydrogen production technologies. Additionally, it offers filtration, after-treatment, control systems, air handling systems, automated transmissions, electric power generation systems, and batteries. The company sells its products to original equipment manufacturers, distributors, dealers, and other customers.
The company was formerly Cummins Engine Company and changed its name to Cummins Inc. in 2001. Cummins Inc. was founded in 1919 and is headquartered in Columbus, Indiana, USA.
QVI's value proposition elevator pitch for Cummins:
Trusted truck diesel engine manufacturer will leverage their reputation for customer-driven responsibility and lead the industry transition to low, if not emissions-free, transport.
Performance vs. Sector and Market
The chart below illustrates CMI's performance against the Industrial Select Sector SPDR® Fund ETF (NYSE: XLI) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since QVI's initial coverage of Cummins in May 2022.
For example, CMI has outperformed its sector and the broader market in total return during the coverage timeframe.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Cummins's investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI's value proposition rating for Cummins: Bullish.
CMI Total Return vs. XLI and SPY
Cummins Inc (CMI) Total Return: 21.27%
Industrial Select Sector SPDR® Fund ETF (XLI) TR: 15.80%
SPDR® S&P 500 ETF Trust (SPY) Total Return: 12.28%
Since may 24, 2022 (as of June 26, 2023)CMI Shareholder Yields
QVI Research Report's shareholder yields section uncovers the equity bond rate of the company's common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
CMI's earnings yield traded above the QVI targeted floor at 7.58%, as demonstrated in the below chart. On the contrary, at 3.87%, CMI's free cash flow yield traded under the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that CMI trades at fair market value. QVI will further explore valuation multiples later in this report.
Dividend Yield
Cummins offers a forward dividend yield of 2.68%, supported by a moderate 33.54% payout ratio, thus indicating a dividend rate with some room for additional annual increases.
CMI yielded 3.28% from an annual payout of $6.28 on a split- and dividend-adjusted cost basis of $191.32 per share on May 24, 2022, the date of QVI's initial stock coverage. Thus, our yield-on-cost basis was +60 bps above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.72% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for CMI was 4.71% or +99 bps above the 10-Year and 4.91% or +119 bps above the Treasury yield when using QVI's May 2022 yield-on-cost basis.
QVI's shareholder yields rating for CMI: Bullish.
CMI Shareholder Yields
Cummins Inc (CMI) Price: $234.13
Cummins Inc (CMI) Earnings Yield: 7.58%
Cummins Inc (CMI) Free Cash Flow Yield: 3.87%
Cummins Inc (CMI) Dividend Yield: 2.68%
One-Year Trailing (as of June 26, 2023Cummins Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Cummins had positive three-year annualized single-digit revenue growth of 6.00%, underperforming the 12.34% median growth of the industrials sector.
Farther down the income statement, Cummins had a trailing three-year high single-digit net profit margin of 8.41%, outperforming the sector's median net margin of 6.35%
Returns on Equity and Invested Capital
Cummins's management produced a trailing three-year return on equity or ROE of 24.74%, surpassing the targeted threshold and the sector's median ROE of 13.98%
Stock buyback programs often elevate ROE. For example, Cummins's board of directors authorized a $2 billion repurchase program in December 2021. The share price has risen about 20% since the announcement.
At 15.03%, Cummins's three-year return on invested capital, or ROIC, was above the QVI threshold and outperformed the sector's median ROIC of 6.97%, indicating that its senior executives are outstanding capital allocators.
In addition, Cummins's ROIC doubles its weighted average cost of capital, or WACC, of 7.67%. (Source of WACC: GuruFocus).
Positive revenue growth, a high single-digit profit margin, and sector-beating returns on equity and invested capital suggest that Cummins's management continues its long history of conservative yet 2nd level performance in the Hoosier State.
QVI's fundamentals rating for Cummins: Bullish.
CMI Returns on Management
Cummins Inc (CMI) Revenue (3y Growth): 6.00%
Cummins Inc (CMI) Profit Margin (3y Median): 8.41%
Cummins Inc (CMI) ROE (3y Median): 24.74%
Cummins Inc (CMI) ROIC (3y Median): 15.03%
Three-Year Trailing (as of June 26, 2023)CMI Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Cummins, Inc. (CMI), including potential catalysts. So let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have no beneficial position through direct ownership of any stock mentioned in this report. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is contributing editor of Quality Value Investing and author of the international-selling book, Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. He received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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