Cummins Earnings: Management Maintains 2023 Guidance, but the Market Sours on Shares

The market sent Cummins’ CMI shares down approximately 7% in intraday trading, following second-quarter earnings. We were encouraged by the fact that management maintained its 2023 guidance, but we think the market was focused on EBITDA margins moderating in the quarter. Consolidated EBITDA margins were down about 90 basis points to 15.1% in the second quarter. Though, there was some noise in both the second-quarter print and the year-ago period. The EBITDA margin contraction eases a bit when excluding costs related to the filtration business. The inclusion of Meritor also weighed on EBITDA margins, given its lower-margin nature compared with Cummins’ margins.

While the market sent shares down by roughly 7%, we elected to increase our fair value estimate by 2% to $253. The increase is largely attributable to our slightly more bullish near-term expectations for both sales and margins. We now expect Cummins to increase sales 17% year on year (versus 15% previously), while operating margins expand 130 basis points to 11.7% (up 10 basis points compared with our previous estimate). Overall, demand remains solid globally, especially in North America, where fleet ages are elevated. We believe this will drive many fleet owners to refresh their aging trucks.

The future looks promising for Cummins, as the company transitions its business to a zero-emission world. During the quarter, management shared it had reached another milestone with respect to electrolyzers, a key tool in hydrogen production. The order backlog for electrolyzers now stands over $500 million. The company has called out electrolyzers as a key growth driver for its Accelera business (formerly named New Power). Cummins projects electrolyzers will make up about two thirds of the sales opportunity, with the balance coming from BEVs and fuel cells.

That said, we think Cummins’ stock is currently fairly valued. We’d like to see a margin of safety in the stock before getting excited about valuation.