The U.S. economy is showing signs of stabilization. The European economy is busy using Band-Aids to conceal structural problems and the high growth economies of China, Brazil, et al. are struggling to maintain their torrid rates of growth. Where does all this leave Cummins Inc. (CMI)? Cummins is a global company manufacturing diesel engines, power generation systems and related equipment in more than 190 countries.
Cummins is organized into four business units: Engines, Power Generation, Distribution and Components. Their product line includes big ticket items such as diesel and gas engines, power generating systems, engine filters, fuel systems, etc. These products are made for the heavy and medium truck markets, oil, gas and mining industries, construction and government markets, and the power generation industry.
Cummins recently reported FY11 and Q4 2011 results. Q4 2011 revenue of $4.9 billion increased 19% from the same quarter in 2010. This increase was driven primarily by strong demand in truck, construction, power generation and oil and gas markets in North America. Cummins also showed demand in the global mining markets. For the year, sales increased to $18,048 million from $13,226 million, an increase of 36.5%. Earnings per share diluted for Q4 2011 increased to $2.86 as compared to $1.84 in Q4 2010, an increase of 55.4%. For the year, EPS diluted increased to $9.56 from $5.28 in FY10.
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Analysts are projecting 2012 revenues in the range of $19,770 million to $20,903.60 million with a consensus average of $20,103.80 million. The consensus sales estimate represents an 11.4% increase over FY11. The sales forecast for FY13 ranges from $20,926 million to $22,756.9 million; the consensus is $21,980.2 million; 21.8% higher than FY11. Earnings estimates are shown in the above chart. Cummins consistently generates free cash flow and has a good history of growing its free cash. The company pays a dividend of $1.33 per share which yields about 1.3%. Dividends have grown quite well over the years.
The company's capital structure is solid with low levels of debt. Profitability metrics, as shown above, are above five year averages and are high on an absolute basis.
Valuation is always a tricky proposition. Depending on your underlying assumptions for growth, interest rates, etc., a DCF model might generate a value of about $187 per share. Current analyst estimates fall in the $120 to $152 range with a median value of $134. Applying the company's five year average PE of 13.4X to FY12 consensus earnings of $10.31 gives us a value of $138. It may appear that on a PE basis, the share price has about a fifteen percent upside. The shares also look cheap on an EV/EBITDA basis.
We would be more conservative in our estimate. Based on our analysis of the EV/Invested Capital ratio, we estimate that Cummins will trade up to a fair value of $129. Cummins has already traded up 23 percent in the last four weeks and 27 percent over the trailing six months. The shares still show a lot of upward price momentum. For this reason, we thing Cummins may be a trading opportunity rather than a long term investment.