While Cummins Inc.’s (CMI, Financial) stock price may have taken a beating as of late, the company’s financial performance in 2021 was fairly decent, even if it didn't necessarily impress Wall Street or investors.
The management has undertaken various initiatives for margin expansion such as intensive cost optimization and increased pricing and surcharges over and above the cost-cutting initiatives in their supply chain and operations. Moreover, Cummins continues to gain traction in the New Power market by re-investing the profits from its core business and forming partnerships to fuel growth.
Given its long-term potential, could the stock be a bargain today due to the recent price pullback?
Strong competitive positioning
Despite fierce competition in the industry, Cummins has strong brand loyalty among customers. Its reputation is based on a track record of consistently delivering durable and fuel-efficient products to customers. The company can also thrive in a highly competitive industry because of this dynamic, which in most cases requires the company to compete directly with its own customers, truck manufacturers.
Its enviable competitive positioning stems from its strong brand reputation. The company has long been a leader in engine manufacturing and has established itself as the go-to product for truck operators looking to refresh or expand their commercial fleet. Cummins' brand strength is demonstrated by the fact that truck manufacturers allow truck operators to choose Cummins engines as an option. Furthermore, their strong product performance has helped them gain market share while also assisting customers in meeting changing emission requirements. Many truck drivers are willing to pay more for products if it results in a lower total cost of ownership, such as increased fuel efficiency.
Recent financial performance
Cummins delivered a mixed result for its fourth quarter of 2021, which has contributed to the stock price's downward trend.
The company reported a top-line of $5.85 billion for the period ended Dec. 31, 2021, which implies 0.34% growth as compared to the $5.83 billion in revenue reported in the corresponding quarter of the previous year and beat the analyst consensus estimate of $5.79 billion.
These revenues translated into a gross margin of 22.51% and an operating margin of 7.15%, which was lower than that in the same quarter of last year.
Cummins reported net income of $394 million, resulting in adjusted earnings per share (EPS) of $2.85 that came in below the analyst consensus estimate of $3.16.
In terms of cash flows, the company generated $732 million in the form of operating cash flows and spent $595 million in investing activities during the previous quarter, leaving the company with a positive free cash flow.
The New Power segment potential
Cummins’ future lies in the immense potential of its New Power segment. It is worth highlighting that most of the company's recent partnerships, including the big Chevron (CVX, Financial) deal as well as the joint venture in Guangdong, are with the sole purpose of advancing this segment.
This segment deals in the sale of electrolyzers which are required to generate hydrogen for fuel cells. It falls into the same ecosystem as companies like Plug Power (PLUG, Financial) and FuelCell Energy (FCEL, Financial). The management has big plans in the fuel cell domain and expects this segment to generate over $400 million in the next five years and have at least 100 trains all over the world that are powered by its fuel cells.
Cummins is investing heavily in building green hydrogen production technology. The management’s vision involves sticking to the diesel and natural gas engines for cash flows in order to fund the low-carbon-focused future of the company.
Emission control tailwinds
Despite increased government emissions regulations, Cummins should continue to remain the leading supplier of truck engines and components. The company has been the preeminent manufacturer of diesel engines for over a century, earning its reputation as one of the best heavy- and medium-duty engine brands. Cummins' reputation is built on high-performance, long-lasting engines. Besides, its ability to increase the value of customers' trucks, resulting in product differentiation, is also valued.
By capturing a larger share of vehicle content, Cummins will likely continue to gain market share. Tighter emissions regulations have allowed the company to sell more of its emissions solutions, such as after-treatment systems converting pollutants into harmless emissions.
It will also benefit from the industry's electrification of powertrains. Cummins is continuing to invest in electric vehicle technology and fuel cells to power future truck models in the long run. A zero-emission world is unavoidable, and Cummins is making the necessary investments to remain in business in the long-term.
Final thoughts
We can see the clear downward trajectory of Cummins’ stock over the past few months on account of the general macro headwinds associated with rising interest rates and the geopolitical tensions in Ukraine affecting the markets. The company is currently valued at a price-earnings ratio of hardly 12.97 and an enterprise-value-to-revenue multiple of 1.19. Both of these are well below the industry averages, and the company’s stock is cheap by these standards. It also has a dividend yield of around 3%, which makes it even more attractive in my view.
However, investors must remember that despite the fact that the Cummins has worked tirelessly to build emission control systems and combustion engines in order to meet environmental regulations, it faces a strong risk of not being able to keep up with future regulations. If it can't adapt quickly enough, there is an opportunity for competitors to swoop in and steal its thunder. If it can keep up with the times, there is definite upside potential as a value investment.
