Construction Stocks

Cummins Inc Valuation – January 2019 $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.

Downloadable PDF version of this valuation:

ModernGraham Valuation of CMI – January 2019

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 $24,174,063,768 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.54 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 61.15% Pass
6. Moderate PEmg Ratio PEmg < 20 16.23 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.02 Pass
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 1.54 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.45 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 $9.28
MG Growth Estimate 1.42%
MG Value $105.22
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $134.53
MG Value based on 0% Growth $78.86
Market Implied Growth Rate 3.86%
Current Price $150.56
% of Intrinsic Value 143.09%

Cummins Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has no initial concerns. As a result, all value 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 $9.28 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.86% 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 $113.98. The company pays a dividend of $4.21 per share, for a yield of 2.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 16.23, which was below the industry average of 18.63, 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 $-6.61.

Cummins Inc. performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$6.61
Graham Number $113.98
PEmg 16.23
Current Ratio 1.54
PB Ratio 3.02
Current Dividend $4.21
Dividend Yield 2.80%
Number of Consecutive Years of Dividend Growth 12

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $9,863,000,000
Total Current Liabilities $6,416,000,000
Long-Term Debt $1,563,000,000
Total Assets $18,992,000,000
Intangible Assets $2,060,000,000
Total Liabilities $10,932,000,000
Shares Outstanding (Diluted Average) 161,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $13.18
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 $9.28
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 – March 2018 $CMI
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

Other ModernGraham posts about related companies

Flowserve Corp Valuation – January 2019 $FLS
Home Depot Inc Valuation – November 2018 $HD
Cavco Industries Inc Valuation – September 2018 $CVCO
LGI Homes Inc Valuation – September 2018 $LGIH
Stantec Inc Valuation – August 2018 $TSE-STN
Simpson Manufacturing Co Inc Valuation – August 2018 $SSD
KBR Inc Valuation – August 2018 $KBR
KB Home Valuation – August 2018 $KBH
SNC-Lavalin Group Inc Valuation – August 2018 $TSE:SNC
Stella-Jones Inc Valuation – July 2018 $TSE-SJ

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top