Cummins’s 28.9% return over the past six months has outpaced the S&P 500 by 12.8%, and its stock price has climbed to $426.90 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Cummins, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Cummins Not Exciting?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Cummins. Here are three reasons why CMI doesn't excite us and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Cummins’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 2.3% over the last two years was well below its five-year trend. We also note many other Heavy Transportation Equipment businesses have faced declining sales because of cyclical headwinds. While Cummins grew slower than we’d like, it did do better than its peers. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Cummins’s margin dropped by 6.9 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Cummins’s free cash flow margin for the trailing 12 months was 4.9%.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Cummins’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Cummins isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 20.8× forward P/E (or $426.90 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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