2022 was a rough year for investors, with nearly all S&P 500 (SPY) sectors ending the year in negative territory, except for energy.
Meanwhile, staples and utilities exited the year with only a marginal decline, with many investors looking to play defense.
Fortunately, 2023 is off to a much better start, with the S&P 500 already clawing back nearly one-fourth of last year’s losses and working on a 4%+ monthly return for January.
While this is great news for investors hoping for a recovery in their portfolio, many of the most attractive value stocks are already up sharply off their lows, and the recent rally hasn’t made it any easier to find names with a large margin of safety.
However, there are still some attractive names out there that offer growth at a reasonable price.
This large-cap company hails from the Industrials Sector (XLI) and offers an attractive dividend yield (2.6%) and diversification for a portfolio in a sector where it’s historically been more difficult to find growth.
Growth At A Reasonable Price
Cummins (CMI) is a $36 billion company in the trucks & parts industry, specializing in diesel and alternative fuel engines/generators and related components and technology.
The company recently came off the acquisition of Meritor. This $3.7 billion acquisition boosted its ePowertrain portfolio and opened up new opportunities for supplying the industry with axles and brakes.
The deal has meaningful cost synergies from an SG&A standpoint, plus allows for facilities optimization. The combined company should continue to gain market share, which Cummins has excelled at over the past two decades, trouncing its peer group and global truck markets with a 6.3% compound annual revenue growth rate.
This strong growth in sales (6.0 billion to $24 billion in FY2021) while maintaining strong margins has allowed the company to steadily increase returns to shareholders, evidenced by its annual dividend growing from $0.30 in FY2005 to $6.00 this year.
In the same period, annual EPS has soared from $2.65 to FY2022 estimates of $16.40, and Cummins is on track to grow annual EPS to $23.00+ in FY2025 despite the challenging macro environment.
That growth is expected to be driven by continued market share gains plus the benefit of synergies from the Meritor deal combined with disciplined and strategic investments to grow its business.
Notably, the company’s continued investments, coupled with strategic M&A, have positioned the company very nicely for the future, with applications across multiple industries and technologies, including diesel, natural gas, propane, hydrogen, fuel cell, and battery systems.
The result is that Cummins is the go-to name not only in its base business but also in its New Power business, where it aims to grow revenue toward a 2030 target of $13 billion in 2030, translating to nearly $50 billion in FY2030 revenue company-wide if it succeeds.
So, while some investors may overlook Cummins, this company checks several boxes with large customers like Volvo, Ram, Komatsu, and Tata, with an impressive dividend growth rate, steady earnings growth, and an industry-leading return on invested capital.
The Fundamental Case
Cummins reported quarterly revenue of $7.33 billion in its most recent quarter, translating to 23% growth year-over-year or a 2-year average revenue growth rate of ~20%.
This has set the company up to report an annual EPS figure of $16.40 in FY2022, representing 12% growth year-over-year.
Meanwhile, FY2023 annual EPS growth is expected to accelerate to 21% growth or $19.80, leaving Cummins trading at ~12.8x forward earnings, a significant discount to its historical earnings multiple of 15.5.
Based on a 10% earnings growth rate and its current forward earnings multiple, Cummins’ PEG ratio comes in at 1.28, a very attractive valuation for a diversified large-cap name with a glowing track record of dividend/earnings growth.
The company is attractively valued relative to other semi-peers such as Deere (DE), Caterpillar (CAT), and Illinois Tool Works (ITW), which all trade at higher PE multiples.
The Technical Picture
If we look at CMI’s technical picture, the stock has spent nearly two years building a large base from its March 2021 high and finally looks to be setting up the right side of this base in a 20-month cup & handle pattern.
The stock is back above its rising 50-day and 200-day moving averages and made a new 1-month high ahead of the market last week, continuing to be one of the few large-cap names in a strong uptrend.
Given this improved momentum, I see the stock as one of the better buy-the-dip candidates outside of the tech sector, and I would not be surprised to see the stock hit new all-time highs above $280.00 before summer.
From a bigger-picture standpoint, any breakout to new all-time highs should translate to a measured move to at least the $320.00 level, pointing to over 26% upside from current levels while investors collect a 2.6% dividend yield.
The Bottom Line
Based on what I believe to be a fair multiple of 16x earnings and FY2023 annual EPS estimates of $19.80, I see a fair value for CMI of $316.80, translating to a 25% upside from current levels.
After adding in its current dividend, the total return increases to ~28%.
Although this pales in comparison to some high-flying growth names, I see CMI as a way to diversify one’s portfolio and add a stable dividend yield with a high likelihood of future dividend growth, making the stock a Buy on any weakness below $250.00.
The above analysis of Cummins (CMI) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Cummins (CMI) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Cummins (CMI) is in a strong uptrend that is likely to continue. While CMI is showing intraday weakness, it remains in the confines of a bullish trend. Traders should use caution and utilize a stop order.
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