Investments in companies with solid growth prospects and low share prices might be considered a smart move for investors wanting exposure in the U.S. markets. Cummins Inc. (NYSE: CMI) could be one such attractive option for value investors.
The $29-billion company operates in the Industrial Goods sector, and more than 75% of stocks in this sector carry either Strong Buy or Moderate Buy consensus ratings. The sector benefits from improvements in industrial production, growth in U.S. GDP, healthy trade relations, and infrastructural investments.
Cummins has expertise in designing and manufacturing engines, including natural gas and diesel variants and hybrid and electric powertrains. It also provides components, including turbochargers, filtration, batteries, and control systems for powertrains. The company is headquartered in Columbus, IN.
Cummins reported upbeat earnings in the first two quarters of 2021 but failed to meet the consensus estimate by 5.6% in the third and 13.3% in the fourth quarter. Supply-chain restrictions and cost inflation adversely impacted results, partially offset by effective pricing actions. Shares also lost momentum, evident from the 23.9% decline in price over the past year.
Interestingly, the price dip could now be an opportunity to gain exposure to Cummins, supported by the engine marker’s solid fundamentals and future growth prospects.
Cummins: Strengths and Opportunities
Acquisitive Nature: Over time, the company’s buyouts have strengthened its product offerings and customer base globally, allowed deeper penetration into end markets, and expanded its sales network. Cummins is also working on its pending acquisitions of Meritor, Inc. (MTOR) and Jacobs Vehicle Systems, a subsidiary of Altra Industrial Motion Corp. (AIMC).
Also, the company will be buying Westport Fuel Systems Inc.’s stake in Cummins Westport Joint Venture through a share purchase deal. A 50% stake acquisition in Momentum Fuel Technologies, completed in January, will add more vigor to Cummins’ existing natural gas powertrain portfolio.
Decarbonization: Cummins seems well-positioned to leverage benefits from efforts worldwide to transition to low-carbon or zero-carbon emission products. Its skilled workforce, innovative capabilities, and customers’ trust set it apart from its peers in this arena.
The company’s Chairman and CEO, Tom Linebarger, believes that the decarbonization efforts across industries have created business opportunities for Cummins.
Growth Investments: Cummins has been consistently investing to boost opportunities in its base businesses (including Engine, Distribution, Components, and Power Systems segments). During 2019-2021, it invested $4.6 billion in these businesses. Also, its investments in the New Power segment amount to approximately $0.9 billion.
Such investments are only possible through solid financial performance and healthy cash generation. During 2019-2021, the company’s cash generation from operating activities totaled $8.2 billion. Besides investments, the company used $5.7 billion to reward shareholders.
Aftermarket Sources of Revenue: Cummins had a nearly 12 million installed-engine base at the end of 2021. With such an engine population, the need for aftermarket services is likely to remain strong in the years ahead. Also, complex components (including brakes, turbos, axles, and others) in powertrains are likely to keep revenues flowing through aftermarket services.
Financial Growth & Projections: Over the past three years, Cummins’ revenues have increased from $23.6 billion in 2019 to $24 billion in 2021. Likewise, its earnings expanded to $14.61 per share in 2021 from $14.48 per share in 2019. The pandemic harmed the company’s results in 2020.
For 2022, Cummins anticipates revenues to increase 6% year-over-year. Capital expenditure is forecast to be within the $850-$900 million range.
Wall Street’s Take
Recently, Ross Gilardi of BofA Securities maintained a Buy rating on Cummins and lowered the price target to $260 (26.67% upside potential) from $280.
Meanwhile, Robert W. Baird analyst Luke Junk reiterated a Hold rating on Cummins with a price target of $230 (12.05% upside potential).
The stock currently has a Moderate Buy consensus rating based on six Buys and four Holds. The average price target of $264.50 suggests 28.86% upside potential from current levels.
Inputs from TipRanks Data
Cummins’ fundamentals appear strong, with a return on equity of 25.77% and asset growth of 4.8% recorded over the past 12 months.
Also, blogger sentiment for Cummins appears Bullish. The TipRanks Blogger Opinion Tool reveals that 92% of bloggers on Cummins are bullish about the company’s prospects, compared with the sector average of 70%.
Conclusion
Cummins seems to be a suitable industrial pick for value investors. Further, investors interested in long-term holdings could also keep Cummins on their preferred lists.
In 2023, the company anticipates revenues to be within the $41-$46 billion range, including $33-$35 billion for base businesses, and $6-$13 billion for New Power. Cash flow from operations is forecast to be greater than $30 billion for base businesses from 2022 to 2030.
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