Is Cummins' Recent 43% Surge Justified After Alternative Power Partnership News?

• Curious whether Cummins is actually undervalued right now? You are not alone, as plenty of investors are trying to figure out if it is a good time to jump in or hang tight.
• The stock has caught plenty of attention, climbing 5.0% over the last week and surging 43.0% year-to-date. This points to either fast-growing optimism or a major shift in risk perception.
• Recent headlines have highlighted Cummins' push into alternative power and a fresh round of industry partnerships, adding context to the stock’s upward moves. Big investors are closely watching the company’s strategy pivots, especially as energy-transition news continues to make headlines.
• On our valuation scorecard, Cummins scores 3 out of 6 checks for undervaluation. Up next, we will break down the main approaches that investors use to gauge value, but keep reading for an additional perspective on what really matters for this stock at the end of the piece.

Cummins delivered 36.7% returns over the last year. See how this stacks up to the rest of the Machinery industry.

Approach 1: Cummins Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company's value by forecasting its future cash flows and then discounting those projections back to their value today. This approach helps investors gauge what a business is really worth, beyond just current profits or market trends.

For Cummins, the latest twelve-month Free Cash Flow stands at $2.32 Billion. Analysts forecast steady growth, with Free Cash Flow expected to reach $4.64 Billion by 2029. Beyond the analyst horizon, further projections are extrapolated and show the company could exceed $6.6 Billion in annual cash flow by 2035.

Taking these projections into account, the DCF analysis calculates Cummins' intrinsic value at $635.92 per share. This figure is about 21.8% higher than its current trading price, indicating notable undervaluation.

DCF models are not flawless. In this case, they suggest there is meaningful upside for investors at today's prices.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Cummins is undervalued by 21.8%. Track this in your watchlist or portfolio, or discover 926 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Cummins.

Approach 2: Cummins Price vs Earnings (P/E)

The Price-to-Earnings (P/E) ratio is a widely used valuation metric for profitable companies because it connects a stock's price directly to its earnings, offering investors a straightforward way to assess value relative to profitability. If a company has steady profits, the P/E ratio can reveal whether the market is pricing in future growth or factoring in heightened risks.

Growth prospects and company-specific risks both influence what a “normal” or “fair” P/E ratio should be. Businesses with fast-rising earnings or low-risk profiles usually command higher P/E ratios, while those with slow growth or higher risks tend to be assigned lower ones by the market.

Cummins currently trades at a P/E of 25.7x, which is a touch higher than both its industry average of 24.8x and its immediate peer group’s average of 22.9x. These numbers suggest that the market is expecting a bit more growth or stability from Cummins compared to its Machinery peers.

To provide a more tailored benchmark, Simply Wall St calculates a “Fair Ratio” of 34.4x for Cummins. This proprietary metric considers factors beyond broad industry averages, including the company’s growth forecasts, profit margins, size, and risk profile. It is specifically designed to offer a more holistic view of what valuation multiples are justified for a given business.

By stacking the Fair Ratio (34.4x) against Cummins’ current P/E (25.7x), we see that the stock is trading notably below its fundamentally justified range. This suggests the market may be underestimating Cummins’ potential.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1434 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Cummins Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is a simple, yet powerful tool that lets you connect your view of a company's story, including its growth drivers, risks, and industry changes, to a detailed financial forecast so you can arrive at your own fair value for the shares.

Narratives bring investing to life by giving you the ability to put your perspective, assumptions, and expectations behind the numbers. This includes how much you think Cummins can earn, what margins are likely, and what the broader future might hold, making valuation more relevant and personal.

On Simply Wall St's Community page, millions of investors use Narratives to easily build, share, and refine their outlooks, and to instantly compare their Fair Value with the live market Price. This approach allows you to quickly see if your story signals “buy,” “hold,” or “sell,” and as new news or earnings emerge, your Narrative updates automatically to reflect the latest information.

For example, one investor might base their Narrative on strong data center power demand and arrive at a $500 fair value. Another investor, who is more cautious regarding truck cycles, could estimate just $350. Your own Narrative helps you confidently decide which future you believe in and what action you take today.

Do you think there's more to the story for Cummins? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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