Headquartered in Columbus, Indiana, Cummins (CMI) is an American Fortune 500 company that designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products. The company is nearly 100 years old industrial powerhouse. It operates in more than 190 countries (nearly 60 000 employees worldwide) and have a network of almost 8 000 dealers.
Over the last few years, macro growth trend has offered tailwind for Cummins. Strong product portfolio, global partners and technology leadership, they all give additional support. Despite the good results, this year’s stock price trend has been disappointing. The reason is obviously investors worry about possible end of the long bull cycle.
What many investors do not recognize is, while the industry Cummins serves might experience short-term pain during the next recession, in the long run Cummins will be even stronger. As a technology leader any shifts due to technology innovation would be met by Cummins. Only few competitors can build the products it can.
In the short term, Cummins is benefiting from a stronger North American heavy duty truck cycle. Truck demand is expected to be very strong right now and during the coming year. Cummins’ high backlogs predict a stronger growth in revenue than previously expected. This affects directly the company’s cash flow and earnings per share.
Much is based on that Cummins has engineered a reputation as one of the world’s leading engine manufacturers and is well-known for reliability and superior quality. The company also generates nearly half of its profit outside of the U.S., and the world economy will likely grow faster for the foreseeable future than U.S. domestic economy.
Cummins’ financials and valuation
Over the last three quarters Cummins has documented impressive growth rates above 20%, and the stock price is down 22% from the start of the year. Based on the current forecast, the company expects full year 2018 revenues to be up 15 to 17 percent and EBITDA of 14.8 to 15.2 percent of sales, unchanged from prior guidance.
“We delivered record earnings for quarter 3/18 due to increased demand in a number of key markets, growth in our market share and the benefits of cost reduction initiatives,” said Chairman and CEO Tom Linebarger. “We have completed our previously announced $500 million accelerated share repurchase plan and our Board of Directors recently authorized a new $2 billion share repurchase plan, which reflects our confidence in our long-term performance. Year to date, we have returned $1.4 billion to shareholders in the form of dividends and share repurchase, consistent with our plan to return 75% of operating cash flow in 2018.”
The company has taken care of its shareholders both purchasing undervalued shares back and increasing its dividends faster than average. Even though the last dividend rise was only 5.5%, during the past 3, 5 and 10 years, the average dividends per share growth rate was 14.4%, 19.4% and 27.5% per year, respectively.
After rhe last stock market correction Cummins’ valuation has dropped to a more moderate level. The company’s P/E is 17, which is somewhat same as a long-term average. Instead P/FCF 14.5 and EV/EBIT 8.7 are slightly below the long-term averages. Cummins is not a shouting bargain, but for a long-term investor it can offer good and steady returns. Especially since the company’s ROE has returned back to over 20% level.
We should bear in mind Cummins’ better than average 3.3% dividend yield plus steadily increasing dividend flow. Also, strong cash flow and increasing EPS estimates – over $13.00 for current year and $13-15 for 2019 and 2020 – provide support for good returns expectations. It’s not impossible that stock market price of Cummins is over $225 after two years (PE 16 x 14.00 EPS) compared to current price $134. And in addition the company could offer $5.20-5.60 dividend per share.