Cummins Earnings: We Expect Near-Term Challenges but Our Long-Term Thesis Remains Unchanged

We elected to raise our fair value estimate by nearly 1% to $255 (from $253 previously), following third-quarter earnings. The increase to our fair value is largely attributed to the time value of money since our last update but was partially offset by slight tweaks to our near-term sales and margin expectations.

Cummins’ CMI 2023 guidance implies fourth-quarter revenue will be challenged compared with the same period a year ago. The key callouts by management included softer aftermarket demand in the engine business, challenges in China, and supply constraints in North America. On the aftermarket side, the company noted that truck utilization rates have moderated, leading to some inventory destocking among fleet owners. Management also pointed to lower demand for the company’s products in some off-highway markets.

To help ease the near-term headwinds, Cummins announced some cost reduction initiatives that will target selling, general, and administrative costs. Overall, we view the update from the company as a near-term challenge. We still have enough confidence to forecast nearly 19% sales growth in 2023, while EBITDA margins come in at approximately 15.2%. We’re expecting a strong performance from Cummins’ components business, which includes its recent acquisition, Meritor. For the full year, Cummins provided a sales range of $4.7 billion-$4.9 billion for Meritor, with 10.5%-11.0% EBITDA margins.

The Accelera business continued to gain momentum, reaching $103 million in sales during the third quarter. The segment has yet to post a profit but has made good progress. Cummins pointed to increasing demand for its electrolyzers, in addition to delivery of battery electric systems for the North American bus market.

On valuation, Cummins currently trades at a 15% discount to our $255 fair value estimate. We’d like to see a greater margin of safety in shares before getting excited about valuation.