As of September 6, 2023, Cummins Inc (CMI, Financial) is experiencing a daily gain of 1.85%, with a 3-month gain of 6.12%. With an Earnings Per Share (EPS) of 17.85, the question arises: Is the stock modestly undervalued? This article aims to provide a comprehensive analysis of Cummins' valuation, offering insights into its financial strength, profitability, and growth. We invite readers to delve into the analysis below to discover whether Cummins presents a valuable investment opportunity.
Company Snapshot: Cummins Inc (CMI, Financial)
Cummins Inc (CMI) is a leading manufacturer of diesel engines, primarily used in commercial trucks, off-highway equipment, and railroad locomotives. The company also produces standby and prime power generators and sells powertrain components, including transmissions, turbochargers, aftertreatment systems, and fuel systems. Despite facing robust competition and increasing government regulation of carbon emissions, Cummins has maintained its industry leadership. The company's stock price is currently $236.13, with a market cap of $33.40 billion, while the GF Value stands at $310.59, indicating that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. Given Cummins' current price of $236.13 per share and a market cap of $33.40 billion, the stock appears to be modestly undervalued.
Examining Cummins' Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it's important to carefully review a company's financial strength before deciding to buy its stock. Looking at the cash-to-debt ratio and interest coverage can provide a good starting point for understanding a company's financial strength. Cummins has a cash-to-debt ratio of 0.28, which is worse than 79.08% of 2792 companies in the Industrial Products industry. The overall financial strength of Cummins is ranked 6 out of 10, indicating fair financial health.
Profitability and Growth of Cummins (CMI, Financial)
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Cummins has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $32.20 billion and an Earnings Per Share (EPS) of $17.85. Its operating margin is 9.45%, which ranks better than 64% of 2800 companies in the Industrial Products industry. Overall, the profitability of Cummins is ranked 9 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cummins is 9.3%, which ranks better than 59.39% of 2672 companies in the Industrial Products industry. However, the 3-year average EBITDA growth rate is 4.9%, which ranks worse than 59.31% of 2364 companies in the Industrial Products industry.
ROIC vs WACC: A Measure of Profitability
Another way to determine a company's profitability is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Cummins's return on invested capital is 11.21, and its cost of capital is 8.46.
Concluding Thoughts
In conclusion, Cummins (CMI, Financial) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 59.31% of 2364 companies in the Industrial Products industry. To learn more about Cummins stock, you can check out its 30-Year Financials here.
To discover high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
