Cummins, Inc. (NYSE:CMI)

CAPS Rating: 4 out of 5

Designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems.

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Member Avatar 2trpop (86.27) Submitted: 10/14/2015 8:42:25 AM : Outperform Start Price: $108.99 CMI Score: -19.99

FSTG Experiment


Member Avatar notyouagain (56.99) Submitted: 9/22/2015 3:50:06 AM : Outperform Start Price: $113.82 CMI Score: -25.42

Beginning start price $114.95

Cummins makes its name in diesel and natural gas engines that power heavy machinery and big rig trucks. At a marketcap of over $20.5B, Cummins is a big name internationally.

With an annual dividend that was boosted by 25% in July to $3.90, Cummins has a dividend yield of 3.4% powered by only 33% of its earnings... earnings that have grown at a rate of 12.24% annually over the last 5 years, according to the Fool's "ratios" page. The Fool's "ratios" page also tells me that Cummins has a 5-year average dividend growth rate of 30.82%.

Oh, there's a lot, lot, going on here.

First thing I do is look over some other metrics from the Fool's "ratios" page.
Cummins PE is at 12.1, and it's only a few bucks above its 52-week low of $112. Its 52-week high is $151.25.

Cummins "quick" ratio, measuring its ability to pay its current liabilities with only its cash and short-term investments that can be easily converted to cash, is "1.30."

Cummins "current" ratio, which measures its ability to pay its current liabilities out of total current assets, is "2.20."

Cummins total debt to equity is 0.21. (Industry average is 1.26). Only $1 out of every $41.20 Cummins earns is needed for interest expense, which is just another way of saying Cummins interest coverage ratio is 41.20.

Net margin for Cummins for the trailing twelve months is 9.20 vs an industry average of 6.40.
Return on assets for the trailing twelve months is 11.40 vs an industry average is 2.40.
Asset turnover for the trailing twelve months is 1.30 vs an industry average of 0.40.

Asset turnover is revenues/assets.
Net margin is net income/revenues.

Asset turnover X net margin is return on assets. As you can see, they're clobbering the competition.

Ok. Often, I'll continue to investigate, but at this point I'm pretty sure I'll like what else I can find. And that's certainly the case here.

Now, before I leave the Fool to pursue the data at, this time I had a wild hair and looked through the Fool's scorecard.
I'm floored. Almost everyone who has greenthumbed this stock going back to around midway through 2010 is in the red.
So why should I believe I'll have better luck going forward?

Once upon a time, my friends, under a different username, I wrote a fairly long blog explaining exactly...precisely...the answer to this question. You can find that blog here:

I never once promised you a short pitch. If you want to know exactly why I'm daring this not to be a good long-term pick even in the face of the daunting story the Fool scorecard is telling me you'll read...the blog.

Now on to for some more red meat.
I'm now going here:

Morningstar's stock quote page for CMI lists both the trailing twelve months PE of 12.1 and the forward PE of 10.5. It also lists a analyst consensus rating of "4.1" ("1.0" = "sell" and "5.0" = "buy")

Now going down the left-hand side of the page to key stats, everything looks very good except for revenue growth and net income growth. But those are 3-year averages. Further examination reveals that long-term performance of this company is stunningly different than those figures suggest.
Also shown here is CMI's return on equity of 22.1 vs the industry average of 8.1...the Fool shows return on equity on the "stats" page, but doesn't list the industry average.
Here we can just begin to get a glimmer of just how powerful an earning machine this company is.

CMI has a debt/equity of only 0.2 vs an industry average of 1.0 according to Morningstar or 1.26 according to the Fool.
That means CMI employs far less leverage than its competition, yet achieves a return on equity almost triple theirs. This is very significant, because

Return on equity = net margin X asset turnover X financial leverage....or
(Net income/revenue) X (revenue/assets) X (assets/equity)

As I pointed out earlier, the first two, net margin X asset turnover, equals return on assets. The last one, assets/equity, is a measure of financial leverage. When a company can earn more on assets acquired by debt than the interest charges associated with the debt, return on equity and earnings per share benefit tremendously as long as the debt is kept at a level the company can easily handle.

So let's move on to Morningstar's key ratios page for CMI.

Take a good look at those figures. That's 10 years...and it paints a far, far, different picture of CMI.
Revenue was $9,918M in 2005.
Revenue in the trailing twelve months was $19,704M.

Net income was $550M in 2005.
Net income in the trailing twelve months was $1,725M.

Earnings per share was $2.75 in 2005.
Earnings per share in the trailing twelve months was $9.52.

There were 200M shares outstanding in 2005.
That has fallen to 181M shares in the trailing twelve months.

Book value per share has increased from $9.47 in 2005 to $43.96.

Free cash flow has climbed in most years, but the general trend is sharply upward...from $574M in 2005 to $1,338M in the trailing twelve months.

It's ok for free cash flow to vary and not increase every year, year in and year out. Some years cap spending might be higher as the company invests in future growth, some years more long-term debt might become current, etc. Here is CMI's cash flow statement.

At the top is net income. Below net income, you see depreciation, which is added back to net income because it doesn't represent cash going out during that period.
If you understand how the changes in all the other working capital accounts affect the operating cash flow, good on you! You basically just have to remember increases in current assets are subtracted from net income, and increases in current liabilities are added back to net income.
Example: an increase in accounts receivable would be subtracted since it was counted as revenue in figuring net income but the cash hadn't been received yet.

Anyway - and this is a big one - the cash flow statement doesn't separate capital expenditures for renewal and replacement from those for expansion and growth. But since most companies use straight line depreciation for the statements we see (as opposed to using accelerated depreciation on their actual tax returns) (yes, they're allowed to keep two sets of books - one set for us, and another for tax purposes) - that depreciation expense is a rough guide to the amount of assets that may wear out or need replaced during the year.

So here's where the rubber meets the road. Look at the operating cash flow numbers for CMI. Every year, operating cash flow very, very, significantly exceeds the sum of depreciation and dividends, so it generates plenty of excess cash to fund the dividend, expand the business, make acquisitions, and buy back large amounts of its stock.

CMI has one beautiful cash flow picture and a fast-growing dividend with a payout ratio of only 33%. This company can handle a downturn and handle it well. Look back through the last 10 years. It's proven its ability to take on recessions.

And because that dividend is now sporting a current yield of 3.4% (versus its 5-year average dividend yield of only 1.7%) I'm fairly confident that this pick will not stay in the red for years like it has for others in the past.

(P.S. Did you read that blog?)


Member Avatar cgabriel75 (< 20) Submitted: 9/21/2015 12:56:52 PM : Outperform Start Price: $113.56 CMI Score: -25.86

Currently below intrinsic value.


Member Avatar wolfhounds (30.45) Submitted: 9/1/2015 2:59:29 PM : Outperform Start Price: $119.02 CMI Score: -31.40

Trucks will have to become more competitive with railroads as well as meeting fuel standards. CMI is in the sweet spot.


Member Avatar kendominiak (< 20) Submitted: 7/28/2015 5:12:46 PM : Outperform Start Price: $125.72 CMI Score: -26.62

trucks world wide face polution fines or see Cummins !


Member Avatar purplehayes4 (53.88) Submitted: 7/22/2015 5:44:58 PM : Outperform Start Price: $124.31 CMI Score: -24.82

Cummins virtually owns some of the truck market segments. It will be cyclical, but worth the ride.


Member Avatar kevinben (26.61) Submitted: 7/16/2015 10:25:23 PM : Outperform Start Price: $127.73 CMI Score: -26.46



Member Avatar lukkyseven (54.31) Submitted: 7/16/2015 12:11:52 PM : Outperform Start Price: $128.18 CMI Score: -26.83

I'll be starting my initial position in this company today with 50 shares. really like past dividend growth history with future potential as well


Member Avatar AnsgarJohn (97.74) Submitted: 6/19/2015 3:55:10 AM : Outperform Start Price: $133.97 CMI Score: -30.22

Via Graham Stock screen, real money pick. DAF Trucks Europe NL looking for more people because of demand.


Member Avatar nonzerosum (68.65) Submitted: 5/28/2015 3:53:43 PM : Outperform Start Price: $136.91 CMI Score: -31.23

Solid moat and prospect of reasonable (10%) long term returns.


Member Avatar BlackbirdSC (< 20) Submitted: 4/27/2015 11:31:14 PM : Outperform Start Price: $133.40 CMI Score: -30.26

Cummins continues to innovate and improve their offerings.


Member Avatar benyboy (< 20) Submitted: 3/30/2015 6:49:38 PM : Underperform Start Price: $135.83 CMI Score: +33.17



Member Avatar fairlyreliable (40.61) Submitted: 3/25/2015 11:40:07 PM : Outperform Start Price: $133.35 CMI Score: -33.04

Long term dividend


Member Avatar CantonTownship (< 20) Submitted: 3/8/2015 4:46:25 PM : Outperform Start Price: $137.10 CMI Score: -33.57



Member Avatar CMFJayNew (91.94) Submitted: 1/25/2015 2:19:49 PM : Outperform Start Price: $142.43 CMI Score: -37.58

long-term trend extremely favorable for this industrial stalwart.


Member Avatar 1russianguy (81.16) Submitted: 1/15/2015 9:17:14 AM : Outperform Start Price: $139.73 CMI Score: -37.90



Member Avatar TMFInnovator (48.19) Submitted: 11/25/2014 12:55:27 PM : Outperform Start Price: $144.76 CMI Score: -37.35

My pitch to Supernova:

The company exhibits the three "must-haves" for any long-term investment:

- A solid competitive position with established customer relationships.
- Very large-scale growth drivers to allow for margin expansion.
- Prudent capital-allocation decisions, which are beneficial to shareholders.

Cummins has given shareholders a compound 28% return per year over the past five years, which is outpacing the S&P by nearly 13% per year. Global demand for extremely low-emission engines, coupled with Cummins' fantastic industry reputation and culture, should keep this one rolling for quite some time.



Member Avatar Orffy (43.92) Submitted: 11/20/2014 3:41:49 PM : Outperform Start Price: $142.83 CMI Score: -36.32

Great company and well run. Produces high-quality engines, which will be important as the global economy increasingly builds future wealth. Cummins has proven that its willing to be progressive, which demonstrates a great management team. Long term.


Member Avatar NetsMasters (< 20) Submitted: 10/8/2014 4:41:51 PM : Outperform Start Price: $129.42 CMI Score: -35.43

Diesel-Electric would be quickest and cheapest investment wise including infrastructure which will NOT be coming from Government this century around as they did last building the "Roads to Nowhere" USA only Europe Hydrogen is ideal


Member Avatar HoustonThomas (99.59) Submitted: 9/14/2014 5:34:18 PM : Outperform Start Price: $133.52 CMI Score: -36.11

ROE and ROIC look good, Sales and Book value per share increasing while Debt is decreasing. Widely recognized name and interest in diesel engines remains strong. At less than $140 a share, this seems like an excellent entry point.

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