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Cummins: This Dividend Stock Is On Sale

May 06, 2018 2:43 PM ETCummins Inc. (CMI)24 Comments
Robert Riesen profile picture
Robert Riesen


  • Sales are expected to grow 10% to 14% during 2018, an increase from the original forecast.
  • I project 11% upside potential based on a discounted cash flow model.
  • Wall Street has a price target of $170, which represents 18% upside potential in the stock.

Image result for cummins seeking alpha

I consider now a good time to buy Cummins' (NYSE:CMI) stock for the following reasons:

  1. All operating trends in 2017 were good, which included 17% sales growth and record free cash flow. This trajectory is expected to continue into 2018, and Cummins recently upped its forecast based on first-quarter results.
  2. The 3.00% dividend is well supported by free cash flow and likely to continue growing.
  3. Cummins is valued attractively based on multiple approaches including a discounted cash flow model, historical valuation multiples, and a comparables analysis.

Financial Snapshot

Cummins rebounded in 2017 and produced strong results. Revenues were up 17%, including 15% in North American sales and a 19% increase in international sales. Excluding charges totaling $777 million from tax reform, net income also increased to $1.8 billion ($10.62/share). The balance sheet is also in a very good shape. $2.3 billion in debt for a company that produces more than $20 billion in revenue and consistent free cash flow is very reasonable.

Data Source: Cummins' SEC Filings

After a strong first quarter, Cummins upgraded its 2018 sales guidance. According to its latest earnings release:

"Based on the current forecast, Cummins expects full year 2018 revenues to be up 10% to 14 %, compared to prior guidance of up 4% to 8%. EBITDA is projected to be in the range of 15.4% to 15.8% of sales, down from 15.8% to 16.2% of sales. Excluding the impact of the first quarter charge for the product campaign, full year EBITDA is expected to be in the range of 16.2% to 16.6% percent."

Dividend Analysis

One of the main reasons to own Cummins' stock is the dividend, which currently has an annual yield of 3.00%. The company has a long dividend history, which goes back to the 1980s. Growth has been particularly impressive in the recent 5 years, which

ChartCMI EV to Free Cash Flow (Annual) data by YCharts

This article was written by

Robert Riesen profile picture
I'm an avid investor, managing my own portfolio. Im also a previous Series 7 License holder and currently studying for the CFA Level II exam. Previous financial experience includes 5 years at Square 1 Bank, a commercial bank specializing in venture lending to entrepreneurs and venture capitalists: - Assistant Vice President – Life Sciences & Technology Banking - Life Sciences Client Manager - Senior Portfolio Analyst - Portfolio Analyst

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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