Cummins Inc. (CMI, Financial) is down marginally so far in 2022, which means the stock has greatly outperformed the S&P 500, where the index is down a mid-teens percentage.
The company also ranks ahead of its peers in the industrial products space on a number of key metrics. Shares are reasonably priced and offer a market-beating dividend yield.
Let’s dig into why Cummins is a top industrial name.
Company background and recent results
Cummins was founded more than a century ago. In the time since then, the company has become one of largest manufactures of engines in the world. Its portfolio of products includes diesel and natural gas engines along with related powertrain components, including fuel systems, batteries and electrified power systems for heavy, medium and light duty trucks. The company consists of five segments: Engines, Distribution, Components, Power Systems and New Power. Cummins is valued at $31 billion and generates annual revenue of $24 billion.
The company reported second-quarter earnings results on Aug. 2. Revenue grew nearly 8% to $6.59 billion, which was $106 million above what the market analysts had expected. Adjusted earnings per share of $4.77 compared to $4.10 in the same quarter of 2021 and beat estimates by 43 cents.
A slowdown in China led to a 2% drop in international markets, but this was more than offset by a 15% gain in North America. The Distribution, Engine and Power Systems segments grew 17%, 11% and 5%. New Power, which is a small but growing business, was up 75% to $42 million. Components was lower by 2%.
Management reaffirmed guidance with an expectation of revenue growth of 8% for 2022. According to Yahoo Finance, Cummins is expected to see adjusted earnings per share of $17.50 for the year, which would be an increase of almost 20% from 2021.
Ranking versus peers
Cummins easily topped what the market had anticipated in the most recent quarter and expectations are high for a strong 2022, but how does the company look against its peers?
Cummins receives a solid score of 8 out of 10 on profitability rank from GuruFocus. Let’s start with the company’s weakest showing, which is gross margin of 24.2%. This is worse than 55% of peers and near the very low end of the company’s last 10 years.
Aside from this, the company turns in some excellent results. Return on equity is where Cummins has its best ranking, with its current score of 24.6% beating 92% of industry peers. This is also near the higher end of the company’s 10-year history. Return on assets is solid as well, coming in above 81% of the competition while return on capital is better than 84% of peers. Cummins has had 10 years of profitability, which places the company above a remarkable 99.96% of the more than 2,600 names in the industry.
Turning to financial strength, Cummins scores a 7 out of 10. The majority of the scores here are in the middle of the pack or below. For example, the company’s worst ranking is the equity-to-asset ratio, which is below more than three-quarters of the competition. The debt-to-equity and cash-to-debt ratios are lower than 70% and 64% of peers. On the plus side, both of these scores are near the middle to high results end of the last decade for the company. One area of strength for Cummins is that its return on invested capital of 11.7% is superior to its weighted average cost of capital of 7.4% as the company is seeing good return on its investment.
Cummins scores 7 out of 10 on growth, though the only area where the company tops the majority of its peers is on three-year book growth. Here, the company tops 62% of peers. Nearly everywhere else shows Cummins to be in the middle of its industry, including in the areas of revenue, earnings, free cash flow and Ebitda growth. The company is also projected to be about average in earnings and revenue growth over the next three to five years.
Dividend safety analysis
Shareholders have received a dividend increase from Cummins for 17 consecutive years, which has often meant a high rate of growth. Since 2012, the company’s dividend has a compound annual growth rate of 13.4%. The company last raised its dividend by 8.3% on July 12.
While the latest dividend increase is bit at the same level it has been over the long term, the good news is shareholders should expect to continue to see raises in future years as the payout ratios are reasonable.
Shareholders received $5.60 of dividends per share in 2021, while the company earned $14.61 per share. This results in a payout ratio of 38%, which is slightly higher than the 10-year average payout ratio of 36%. From an earnings perspective, the company’s dividend can be considered very safe.
Moving to free cash flow, we see the dividend is likely safe as well. Over the past year, Cummins has distributed dividends of $826 million while producing free cash flow of $1.23 billion for a payout ratio of 67%. This is higher than the average payout ratio of 40% since 2018, but not yet to a place where a dividend cut seems likely. This does explain why dividend growth has been lower in the near term and does bear watching in the future to see if the company can generate higher levels of free cash flow.
One last item to monitor with regards to dividend safety is the company’s debt obligations. Too much debt could reduce the capital left over to continue to pay a dividend.
Interest expense for Cummins totaled just $105 million over the last 12 months. Total debt was $4.61 billion at the end of the second quarter, giving the company a weighted average interest rate of just 2.3%.
The table below illustrates where Cummins’ weighted average interest rate would need to be before free cash did not cover dividend payments.
Source: Author’s calculation
The table shows the weighted average interest rate would need to reach above 11.2% for free cash flow to not sufficiently cover dividend payments. Therefore, it is unlikely that debt obligations will interfere with dividend payments.
Shares of Cummins yield 2.9%, well above the 1.6% average yield for the S&P 500.
Valuation analysis
Cummins is trading near its intrinsic value according to the GF Value chart, which is based on historical ratios, past financial performance and future earnings projections.
With a current share price of $217.54 and a GF Value of $235.84, Cummins has a price-to-GF Value of 0.92. Achieving the GF Value would result in a gain of 8.4%. Add in the dividend and total returns could stretch into the low double-digit range. The stock is rated as fairly valued.
Combining Cummins’ recent results, ranks against its peers, dividend growth history and valuation shows the company to be one of the best in its industry.
The GF Score, which takes into account financial strength, growth, profitability, value and momentum, helps to rank stocks in comparison to each other. The higher the score, the more likely it is to outperform.
Cummins’ GF Score is a solid 87 out of 100.
Final thoughts
Cummins has a lot of positives working in its favor. The company is expected to see good to strong growth for both revenue and earnings per share this year and scores well on a number of metrics. Cummins also has nearly two decades of dividend growth that should continue given the payout ratios. In addition, the stock is trading at a discount to its intrinsic value, making the stock attractive for both value and income.
