B72 Engine And Green Hydrogen Will Fuel Future Opportunities

Key Takeaways

• New engine platforms and acquisitions position Cummins for revenue growth and improved margins in decarbonization and efficiency-focused markets.
  
• Investment in U.S. manufacturing and green hydrogen initiatives will boost operational efficiency, capacity, and European market entry.
  
• Uncertain trade tariffs, softening demand, regulatory challenges, and sensitivity in truck orders threaten Cummins' revenue, margins, and future growth potential.

Catalysts

Offers various power solutions worldwide.

• Cummins is launching new engine platforms such as the X10 and B7.2, which are expected to offer performance and efficiency improvements. This could drive future revenue growth and improve net margins by offering enhanced value to customers.
  
• The acquisition of First Mode and its retrofit hybrid solutions for heavy operations like mining and rail provides Cummins an entry into decarbonization solutions. This could lead to revenue growth and potentially higher margins as industries pivot towards greener solutions.
  
• Cummins' collaboration with bp on a 100-megawatt PEM electrolyzer in Germany positions them as a significant player in the green hydrogen market. This could enhance revenue through entry into new markets, particularly in Europe, where green initiatives are a focus.
  
• The demand for power generation, particularly driven by data centers, is strong. This segment is experiencing margin improvements due to operational efficiencies and increased volumes, which should positively impact earnings.
  
• Cummins is investing over $1 billion in U.S. manufacturing operations in a supportive policy environment, which could enhance operational efficiencies and production capacity, leading to improved earnings and net margins in the longer term.

Cummins Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cummins's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $24.89) by about May 2028, up from $2.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.8 billion in earnings, and the most bearish expecting $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 14.8x today. This future PE is lower than the current PE for the US Machinery industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Cummins Future Earnings Per Share Growth

Risks

• The impact of ongoing and uncertain trade tariffs introduces a significant degree of unpredictability, which can affect demand for Cummins' products and overall business confidence, potentially leading to decreased revenue and lower profit margins.
  
• The softening demand in key markets such as the North America truck market, along with a 14% decrease in revenues from India, signals a potential decline in sales volumes, which could negatively affect overall revenue.
  
• Increased competition from regulatory uncertainties related to the 2027 emissions standards could impact Cummins' ability to effectively price its new products or delay launches, thereby affecting future revenue growth and profitability.
  
• The separation of the Atmus business, while completed, has led to a decrease in components segment revenue, potentially impacting Cummins' revenue base and EBITDA margins due to the effect of losing this income stream.
  
• Cummins is experiencing heightened sensitivity in truck order volumes, particularly with weaker-than-expected heavy-duty truck orders, which threatens to impact revenue and margins if economic conditions do not stabilize or improve.

Valuation

• The analysts have a consensus price target of $349.021 for Cummins based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $460.0, and the most bearish reporting a price target of just $240.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $38.3 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $298.34, the analyst price target of $349.02 is 14.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.