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Shares of Cummins Inc. (NYSE:CMI) have posted a flat performance over the past 12 months, returning only 2.23%. At $99.19 per share, the stock is currently trading near the mid-point of the 52-week trading band between $79.53 and $129.51. In this article, I will perform both the value and dividend analysis for this quality dividend stock to help you in formulating an investment decision.

The CMI stock appears to be attractively priced relative to the company's financial performance (see table below). Although analysts on average predict the firm's revenue and EPS to rise by 2-year CAGRs of 3.9% and 5.6%, which are lower than the average growth rates for a peer group consisting of CMI's competitors such as Caterpillar (NYSE:CAT) and Deere & Company (NYSE:DE), CMI's EBITDA 2-year growth rate is projected to be 14.5%, compared to the peer average of 11.0%.

In addition, CMI's robust profitability substantially outperforms most of its peers, as all of the company's margin and capital return measures are above the group averages. The company also assumes the lowest leverage amongst the group, as reflected by its debt to capitalization and debt to EBITDA ratios of only 11.0% and 0.3x, respectively, compared to the peer averages at 59.9%, and 3.7x.

Moreover, CMI has been able to maintain a solid free cash flow margin. The firm's LTM FCF margin is 3.1%, significantly better than the peer average of only -2.3%, as heavy-equipment manufacturers are mostly characterized by their weak cash flows. Due to CMI's strong profitability and low leverage, the firm has achieved a solid interest coverage at 58.9x. Lastly, both the company's current and quick ratios are fairly in line with the peer average, reflecting a healthy balance sheet.

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Overall, CMI's above-peer-average financial performance should warrant a solid valuation premium for the stock (see table above). Nonetheless, the current stock price of $99.19 implies an average valuation discount of 12.3% to the peer-average EV/EBITDA and P/E multiples, suggesting that the stock is likely undervalued and there is a potential upside.

Furthermore, both CMI's LTM EV/EBITDA and LTM P/E multiples are hovering near their three-year lows (see charts below). Although the downward trend is partially related to the firm's growth slowdown, with CMI's solid profitability, low leverage, and ample liquidity position, I believe the trend is a positive for investors.

The stock currently has a decent 2.0% dividend yield, which is safely backed by the management, as well as the company's ample financial resources. Over the past decade, annual dividend per share has been raised at a significant 10-year CAGR of 16% from $0.30 in FY2001 to $1.33 in FY2011 (see chart below). Over a similar period, the total funds spent on annual dividends and share repurchase are still substantially less than the annual free cash flow generated, indicating that there is an ample room for additional return of capital down the road (see chart below).

Bottom line, CMI shares' risk/reward profile is quite favorable at present due to the low valuations relative to a strong financial fundamental. On top of that, investors can also benefit from the 2% dividend yield and the share repurchase program - both of which are very likely to be expanded given the firm's strong free cash flow generating capability, and thus further enhance the investment's margin of safety. As such, I recommend acquiring the shares at the current price.

Comparable analysis table is created by author, all other tables are sourced from Capital IQ, and all financial data is sourced from Capital IQ and Morningstar.

Source: Cummins: Value And Dividend Analysis