A $200 Million Investment Will Power Expansion Amid Market Risks

Key Takeaways

• Investment in expanding power generation capacity and HELM engine platforms is expected to drive revenue and margin growth in diverse markets.
  
• Joint ventures and strategic focus sharpened by the Atmus separation position Cummins to capture growth in zero-emission markets and improve profitability.
  
• Strategic adjustments in Accelera business reflect difficulties in zero-emission technologies, while softening truck markets risk impacting revenue and growth.

Catalysts

Offers various power solutions worldwide.

• Cummins is investing $200 million in its manufacturing sites in the U.S., England, and India to increase power generation capacity, which is expected to drive strong revenue growth, particularly in the data center market.
  
• The introduction of the HELM engine platforms with options for diesel, natural gas, and hydrogen fuels can capture new markets and improve revenue and margins by offering flexible solutions for diverse customer needs.
  
• The joint venture, Amplify Cell Technologies, establishes local battery cell production in the U.S., targeting to start in 2027, aligning with zero-emission goals and potentially increasing future earnings as electric vehicle markets grow.
  
• The separation of Atmus Filtration Technologies is expected to sharpen Cummins' focus on core businesses and innovative power solutions, potentially enhancing net margins by reducing operational complexity and leveraging core competencies.
  
• Despite a relatively flat revenue forecast, Cummins anticipates increasing profitability and cash flow in 2025 due to higher efficiency and strategic pricing in the Power Systems business, potentially improving EBITDA margins to 16.2% to 17.2%.

Cummins Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Cummins compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Cummins's revenue will grow by 5.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 11.6% today to 8.9% in 3 years time.
• The bullish analysts expect earnings to reach $3.6 billion (and earnings per share of $27.04) by about April 2028, down from $3.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 9.8x today. This future PE is greater than the current PE for the US Machinery industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Cummins Future Earnings Per Share Growth

Risks

• The softening demand in the North America heavy-duty truck market could impact Cummins’ revenues significantly.
  
• The restructuring charges related to Cummins' Accelera business reflect strategic adjustments that could indicate difficulties in optimizing its zero-emission technologies, impacting future margins and potential growth.
  
• Cummins anticipates a decline in industry demand for medium-duty trucks by 5% to 15%, which poses a risk to future revenues and earnings.
  
• Uncertainty and challenges in China's truck market recovery could potentially limit revenue growth from joint ventures and undermine expected earnings from this region.
  
• Global construction demand is expected to remain flat or decline by 10%, affecting both sales volumes and revenue in sectors dependent on this market.

Valuation

• The assumed bullish price target for Cummins is $417.82, which represents one standard deviation above the consensus price target of $363.13. This valuation is based on what can be assumed as the expectations of Cummins's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 bullish analysts, you'd need to believe that by 2028, revenues will be $40.2 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $281.75, the bullish analyst price target of $417.82 is 32.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.