The stock of Cummins Inc (CMI, Financial) has recently seen a daily loss of 2.68%, yet it has managed to garner a 6.92% gain over the past three months. Despite the fluctuating performance, the company's Earnings Per Share (EPS) remain strong at 17.85. This article aims to answer the question: Is Cummins (CMI) modestly undervalued? Let's explore the valuation analysis of Cummins (CMI) in detail.
A Snapshot of Cummins Inc (CMI, Financial)
Cummins is a leading manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives. The company also excels in the production of standby and prime power generators. Despite facing robust competition and increasing government regulation, Cummins has successfully maintained its industry leadership. The company's stock price currently stands at $226.39, while its GF Value, an estimation of fair value, is $310.32. This discrepancy paves the way for a deeper exploration of the company's value.
Understanding the GF Value of Cummins
The GF Value represents the current intrinsic value of a stock derived from our proprietary method. It is calculated based on three factors: historical multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates. We believe the GF Value Line is the fair value at which the stock should be traded.
According to the GF Value, the stock of Cummins (CMI, Financial) is estimated to be modestly undervalued. At its current price of $226.39 per share, Cummins stock is likely to offer higher future returns than its business growth due to its undervaluation.
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Assessing the Financial Strength of Cummins
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Cummins has a cash-to-debt ratio of 0.28, ranking below 79.3% of 2773 companies in the Industrial Products industry. The overall financial strength of Cummins is fair, scoring 6 out of 10.
Profitability and Growth of Cummins
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. Cummins has been profitable 10 over the past 10 years, boasting an operating margin of 9.45%, which ranks better than 63.25% of 2800 companies in the Industrial Products industry. This strong profitability earns Cummins a rank of 9 out of 10.
One of the most important factors in the valuation of a company is its growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Cummins has an average annual revenue growth of 9.3%, ranking better than 59.62% of 2667 companies in the Industrial Products industry. However, its 3-year average EBITDA growth is 4.9%, ranking worse than 59.37% of 2358 companies in the Industrial Products industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted cost of capital (WACC) offers another perspective on its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. For the past 12 months, Cummins's ROIC is 11.21, and its WACC is 8.31.
Conclusion
In conclusion, the stock of Cummins (CMI, Financial) is estimated to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 59.37% of 2358 companies in the Industrial Products industry. For more information about Cummins stock, check out its 30-Year Financials here.
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