About Cummins
Engines.
That is what Columbus, Indiana-headquartered manufacturer and seller of engines (and related parts) of all shapes and sizes, practically all applications and industries, Cummins Incorporated, is obsessed with.
When first considering engines, our minds instantly drift towards car and truck engines under the hood of said vehicles, and while the company does have a large share of that industry, Cummins also puts together and sells engines and related components to other vehicle types and modes of transportation as well.
For instance, some of the company’s customers include the likes of one of the world’s largest commercial truck companies, Paccar, as well as prominent, storied Michigan-based automobile manufacturer and seller, Ford, and major railroads such as Norfolk Southern, Union Pacific, CSX, Burlington Northern Santa Fe (BNSF) and also companies such as Deere & Company, Caterpillar and many other companies that play major roles in a consumer’s everyday life.
The company also plays a rather large role in the residential sector as it is also a supplier of home generators.
If it weren’t for the existence of Cummins, the world would likely be a lot less efficient and thus this company, to us at least, is deemed as fairly recession resistant as many of its aforementioned customers, regardless of the state of the economy, operate at a consistently high level in order to provide the necessary goods and services for their end users and customers.
This is generally a good thing for both members of the company and investors in the company’s stock, especially those who are in it for the long haul.
Let’s put the company’s numbers to the test and see just how right we are (if at all) on this one and also try to devise an opinion as to whether or not Cummins’ stock (NYSE: CMI) is worth considering buying and holding for an indefinite period of time.
Cummins’ stock financials
Trading at a current share price of $223.70 with a market capitalization of $31.67 billion, a present price-to-earnings (P/E) ratio of 16.87 while annually issuing a dividend of $6.28, which is yielding 2.77% at the time of this writing.
This is the kind of start we were hoping for as the company’s stock price seems to be trading at a discount relative to its actual, intrinsic value according to the fact that its P/E ratio is notably less than that of the benchmark of 20 paired with its exceptional dividend of nearly $7 that it rewards its shareholders with each year.
Moving onto the company’s balance sheet, Cummins’ executives are in charge of handling, managing and deploying approximately $30.3 billion in terms of total assets along with around $21.3 billion in terms of total liabilities, which to us is a solid total asset-total liability breakdown, as the value of the company’s total assets outweighs that of its total liabilities by an attractively wide margin.
Another supplemental positive is that this company is more than likely looking to keep a fair amount of (manageable) debt on board as this would both deter potential activist investors and/or private equity firms from seeking to purchase the company and potentially ruin it while simultaneously allowing the company to fuel (finance) growth for the future.
Protection and fuel to the growth fire is what we’ve gathered from the overall state of Cummins’ balance sheet.
As it relates to the company’s income statement, Cummins’ total annual revenue in recent years has pretty much been on par with the state of the greater overall economic backdrop, as revenues in 2018 and 2019 stood at a firm $23 billion, dropping by around $4 billion in 2020 (most likely due to COVID-19, which we understand and are happy to find that the company’s total annual revenues didn’t fall even harder during this timeframe), and then rising to approximately $24 billion in 2021 to its latest reported figure of just north of $28 billion in 2022, according to TD Ameritrade’s platform.
This strong rebound can be attributed to a combination of price hikes due to supply chain and COVID-19-induced pressures tied with more and more of its customers getting back to business as usual and thus buying more from Cummins.
From a cash flow generation perspective, Cummins’ net income has thankfully stayed in and around $2 billion each year since 2018, excluding its mild drop in 2020 (again, expected), where it drifted slightly downwards to around $1.8 billion.
This somewhat verifies our initial hypothesis that Cummins runs a fairly recession resistant business model as its net income has only slightly been hit to the downside during the worst (so far) of COVID-19 and its total cash from operations have remained consistent in the low billions year-over-year (YOY) as well.
Cummins’ stock fundamentals
When it comes to the company’s trailing twelve month (TTM) net profit margin, according to TD Ameritrade’s platform, Cummins’ stands at a sturdy 8.51% to the industry’s average of 6.35%, which is boring but better, just as we expected from a leader in the engine and engine components space such as Cummins.
Lastly, with regards to the company’s TTM returns on both assets and investment(s), both look down on those of the industry’s averages.
For instance, also according to TD Ameritrade’s platform, the company’s prevailing TTM returns on investment(s) stand at 15.12% to the industry’s average of 8.69% as well as its TTM returns on assets trumping the industry’s average at 9.24% to the industry’s average of 8.36%.
Although this company is a seasoned operator in the general, wide and deep engine sector, it certainly hasn’t let up on the efficiency front, which is great to see.
Should you buy Cummins stock?
Obviously, Cummins has a lot going for it.
Supplying a variety of mission critical industries and companies that tend to fare well during recessionary periods is a huge boon for a company like Cummins.
This company is one of the few that essentially has customers lined up for life, irrespective of the booms and busts of the economy.
A little more focused on the company’s stock itself, its valuation is quite favorable as its price-to-earnings ratio indicates that its stock (NYSE: CMI) is modestly undervalued at the moment, it shells out a fantastic annual dividend (which it can seemingly afford to issue given the current state of its financials overall), its balance sheet is in great condition and its TTM net profit margin relative to its competitors is solid as a rock.
Given all of this information, we think it’s best to give Cummins stock (NYSE: CMI) a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.