Cummins stock: time to buy, or wait for a pullback?

Cummins (NYSE: CMI) stock price has done well over the years. Most recently, it has risen in the past four consecutive months, reaching a record high of $338, and bringing its market cap to over $42 billion. 

According to TradingView, Cummins shares have soared by more than 25,000% in the last decades. Excluding dividends, a $10,000 investment in the company in 1987 would now be worth almost $1 million. 

Cummins has been a great compounder, having raised dividends for 18 years consecutively, making it a potential future dividend aristocrat.

CMI growth is continuing

Cummins is one of the biggest industrial companies in the US, where it sells engines to OEM in industries like automobile, marine, defense, motor homes, and fire engines. For example, it is the main engine supplier to companies like Blue Bird Corporation, Navistar, Volvo Trucks, Paccar, and Caterpillar.

It is also a top player in the power industry, where it sells its generators globally. These equipments are used in industries like utilities, data centers, manufacturing, mining, marine, and oil and gas.

Therefore, Cummins is involved in a business that touches almost millions of Americans each day. 

In addition to equipment sales, the company also makes substantial sums of money in selling components. According to its 10k, the components business accounts for about 32% of total sales and 36% of its profits. 

Cummins’ business has done well in the past few years as demand for engines has remained steady. Its annual sales stood at $23 billion before the pandemic and then dropped to $19.8 billion in 2020.

Recently, its sales have done well even as the industry has faced major supply chain issues. Its annual revenue rose from $19.8 billion in 2020 to $34 billion in the trailing twelve months. 

Most of this revenue growth was organic since the company has not made major acquisitions in this period. Its biggest one was Meritor, which it paid $3.7 billion for in 2022.

Cummins business has also been highly profitable as its annual EBITDA has risen from $3.15 billion in 2019 to over $4.4 billion. Its annual EBITDA has been growing gradually after bottoming at $1.9 billion in 2020.

Momentum is slowing

The most recent financial results showed that Cummins business was doing well as its sales jumped to over $8.79 billion from the $8.6 billion it made in the same period last year.

Its gross margin remained intact at 24.9%, while EBITDA improved slightly to $1.345 billion from $1.32 billion a year earlier. 

Most of its revenue came from the engine segment, which made over $3.15 billion in the last quarter. It was followed by the components division whose revenue rose to $2.98 billion and distribution’s $2.82 billion. Its power systems revenue was over $1.58 billion.

The challenge, however, is that Cummins delivered a somewhat weak forward guidance. It expects that its annual revenue will drop by about 3%, while its earnings from its joint ventures will fall by between 5% and 15%.

Components and engines revenue will drop this year, and will be offset by the distribution and power systems business. This decline is mostly because the company has spun off its Atmus Filtration Technologies business into a separately traded entity valued at over $3.3 billion. 

Good valued company

A case for investing in Cummins can be made. It is a leading manufacturer of complex engines and generators that are used globally. Also, it has strong customer relationships, a long track record of paying dividends, and has catalysts, including data center power demand. 

Analysts expect that its business will do well, with its annual revenue expected to be $33.6 billion this year followed by $34.5 billion in the next financial year. The managenent is also working to grow its margins.

Cummins is also reasonably valued, with a non-GAAP P/E ratio of 17.5, lower than the industrial median of 20.7. Its forward P/E ratio of 12.6 is also lower than the median of 23. 

However, the average stock estimate by analysts is $338, which is lower than the industry median of $331.

Cummins stock analysis

The weekly chart shows that the Cummins stock price has been in a strong bull run in the past few years. It has recently crossed several important resistance levels. For example, it rallied above the key point at $254, its highest point in March 2021 and 2023. 

The stock also jumped above the key resistance point at $300, its highest level on April 8. It has remained above all moving averages, while the Relative Strength Index (RSI) and the MACD have pointed upwards.

Therefore, the stock will continue doing well as bulls target the next key level at $400. However, a brief pullback cannot be ruled out when it publishes its results in November.

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