Construction Stocks

Cummins Inc Valuation – March 2018 $CMI

Company Profile (excerpt from Reuters): Cummins Inc., incorporated on February 3, 1919, designs, manufactures, distributes and services diesel and natural gas engines and engine-related component products, including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems and electric power generation systems. The Company’s segments include Engine, Distribution, Components and Power Systems. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers around the world. As of December 31, 2016, the Company served its customers through a network of approximately 600 distributor locations and over 7,400 dealer locations in over 190 countries and territories.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of CMI – March 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $26,103,405,051 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.57 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 53.33% Pass
6. Moderate PEmg Ratio PEmg < 20 17.83 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.61 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.57 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.49 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $8.83
MG Growth Estimate 0.64%
MG Value $86.33
Opinion Overvalued
MG Grade C+
MG Value based on 3% Growth $128.10
MG Value based on 0% Growth $75.09
Market Implied Growth Rate 4.67%
Current Price $157.55
% of Intrinsic Value 182.49%

Cummins Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $8.48 in 2014 to an estimated $8.83 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 4.67% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Cummins Inc. revealed the company was trading above its Graham Number of $108.08. The company pays a dividend of $4.21 per share, for a yield of 2.7%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 17.83, which was below the industry average of 28.57, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-11.35.

Cummins Inc. receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$11.35
Graham Number $108.08
PEmg 17.83
Current Ratio 1.57
PB Ratio 3.61
Current Dividend $4.21
Dividend Yield 2.67%
Number of Consecutive Years of Dividend Growth 12

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $8,928,000,000
Total Current Liabilities $5,677,000,000
Long-Term Debt $1,588,000,000
Total Assets $18,075,000,000
Intangible Assets $2,055,000,000
Total Liabilities $10,816,000,000
Shares Outstanding (Diluted Average) 166,283,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $11.85
Dec2017 $5.97
Dec2016 $8.23
Dec2015 $7.84
Dec2014 $9.02
Dec2013 $7.91
Dec2012 $8.67
Dec2011 $9.55
Dec2010 $5.28
Dec2009 $2.16
Dec2008 $3.84
Dec2007 $3.70
Dec2006 $3.55
Dec2005 $2.75
Dec2004 $1.85
Dec2003 $0.32
Dec2002 $0.53
Dec2001 -$0.68
Dec2000 $0.09
Dec1999 $1.03
Dec1998 -$0.14

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $8.83
Dec2017 $7.48
Dec2016 $8.27
Dec2015 $8.39
Dec2014 $8.48
Dec2013 $7.71
Dec2012 $7.04
Dec2011 $5.78
Dec2010 $3.83
Dec2009 $3.14
Dec2008 $3.47
Dec2007 $3.00
Dec2006 $2.37
Dec2005 $1.50
Dec2004 $0.72
Dec2003 $0.19
Dec2002 $0.14

Recommended Reading:

Other ModernGraham posts about the company

Cummins Inc Valuation – July 2016 $CMI
10 Undervalued Companies for the Defensive Dividend Stock Investor – June 2016
10 Companies Benjamin Graham Would Invest In Today – February 2016
10 Undervalued Companies for the Defensive Dividend Stock Investor – February 2016
10 Low PE Stocks for the Defensive Investor – January 2016

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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