Idea Competition - Cummins ($CMI) The Diesel Giant That Is Ready For The Green Revolution.
Tesla ($TSLA) pioneered EVs, and now the industry is packed with competition. EVs are great for the average commuter, but will Tesla/others have solutions for powering the trains, boats, construction vehicles, etc that make the world go 'round? Unlikely.
My stock pick might be the solution.
Cummins is a global power leader that designs, manufactures, distributes, and services diesel, natural gas, and now electric and hybrid powertrains. They sell to original equipment manufacturers (OEMs), distributors, and dealers in 190 countries for various uses from Ram pickups, heavy machinery, trains, and more.
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Since 2002, Cummins has outgrown competition and the segments they serve with 6.3% revenue CAGR. Cummins has also grown total revenues from $5.6B to $24B and net income from -$103M to $2.1B with 6.7% average net income margin and 22.2% average ROE.
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Cummins has great capital allocation with $3B cash, $4.9B debt (1.3% is current), great credit access, strategic acquisitions (recently OEM Meritor) and $1.3B FCF which they use for dividends (2.29% yield) and $2B of share buybacks.
Thesis:
Attractive valuation and economic and political tailwinds are at Cummins’ back as potential catalysts for growth.
  1. New Power
Cummins commercialized diesel engines in 1919 and continues to make innovations and improvements to powertrains. They offer the most fuel and emission efficient engines in the market and invest heavily in R&D to anticipate, prepare for, and exceed the changing regulations in advance (EPA regulations have reduced emissions by 90% this decade).
Some states, China, Germany, and other countries have announced plans to ban the use of diesel or other internal combustion engines by 2030. Cummins knows that zero emissions is the goal in the coming decades and are investing now to ensure they remain the power leader for a changing world.
"New Power" is Cummins' newest operating segment. It is focused on zero emission and zero carbon solutions. Cummins has a large customer base and strategic partnerships, all needing decarbonization answers.
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Cummins believes the path to zero emissions creates a market opportunity of $100B for 2030. They will service that market by being an integrator and component supplier. Their components business will grow by providing efficient filtration, emissions collectors, and other components to aid emission reduction efforts. When regulations require net zero, Cummins will have already accelerated adoption of FCEV, BEV, and hydrogen systems among their customers before the regulations occur.
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Cummins’ New Power financial targets are $6-13B revenue in 2030 (approx. 15%-28% total projected revenue) with ~$1.3B cash outflow of operations from 2022-2027 reaching breakeven in 2027. With continued worldwide engine population growth and a high-margin component segment, Cummins forecasts EBITDA to grow >20% by 2030. I believe these goals are not overly ambitious.
  1. Food Prices
Global food prices have jumped 40% since the beginning of the pandemic. The Russia-Ukraine war also contributed to a spike in food prices earlier this year as they are substantial exporters of wheat, barley, sunflower oil, and fertilizer. Food prices have been easing but have a long way to go before returning to the norm.
Cummins has over 1 million agricultural engines in operation worldwide. Their products provide greater fuel efficiency, horsepower, durability, and less ownership costs than competitors. During periods of high food prices, farmers can widen margins if they manage COGS and I expect this benefit to extend to Cummins as farmers look to their products to unlock efficiencies and savings.
  1. Valuation
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Using a 10-year timeframe and above assumptions, $CMI appears undervalued with potential long-term and short-term returns per the model and thesis.
Risks:
  • Freight Demand: Cummins is sensitive to freight demand. With a looming recession, consumer spending could slow causing truck operators to delay new fleet purchases.
  • Regulation: Though regulation is my main bull case, strict regulation could push competition to invest in technologies and dull Cummins’ edge.
  • Inflation: Cummins’ COGS has increased via more expensive materials and shipping costs. They have raised prices to counter, improving margins for two quarters. However, continued price increases could pose a problem.
Author’s Statement
I have a position of 2.372312 shares with $209.56 average cost. Understanding the potential upside and risks, I plan to hold, buy more shares, and reinvest dividends long-term. Below is a screenshot of $CMI trending in Commonstock mentions on 8/31/22 and linked is a verified purchase.
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Cummins will be around for a while, they’ve consistently been a name that is associated with durability and quality. You could say in the future we’re gonna see a lot more Cummins than a lot more Goings y’knaw I mean?
Dividend Dollars's avatar
@tuffnutt dude, why didn’t I end my post with “we’re gonna see a lot more Cummins than goings” 😂 that is genius
Really awesome to see companies like
Cummins innovating and improving their
products to support sustainability efforts.
As the demand for EVs and clean power
increases, and populations also increase,
believe that Cummins will be a major
player in this market due to their ability to
make engines that support the
transportation of needed goods
throughout the world while also making
changes to affect current issues like
pollution, climate change, etc. It may be a
while for this innovation to be fully
implemented and at a place where their
supply meets their demand, especially if
lead times on parts and semiconductors
stay where they've been in the last few
years. But until then, I believe that this
stock could be a great investment,
especially for the long-term.
Dividend Dollars's avatar
@cargunso oh good point about population growth. I didn’t even think about that. Food shortages are a big issue right now and will be exacerbated over the long term with population growth. More people need more food meaning farmers and transporters will need to be more efficient! $CMI is the company that helps them do that
Colt's avatar
Good job on this report! One of the best i’ve read!
Dividend Dollars's avatar
@r3ilyy thanks for reading Colt!
Scoreboard Investor's avatar
Heavy industrials with solid FCF and a growing dividend? Where do I sign up?

Great write up, sir!
Dividend Dollars's avatar
@scorebdinvestor thank you! $CMI definitely seems like you type of investment
You sparked my interest in this company and it's 100+ year commitment to new solutions. Because of your analysis, I further researched and found that they have been making consistent progress and improvements on emissions for a cleaner environment since 1970. Impressive.
Dividend Dollars's avatar
@susanscommon thanks Susan! I didn’t know they’ve been making emissions efforts for that long! Very much needed work in that space
Tyler's avatar
You mentioned they’re sensitive to trucking orders, how much of a risk/downside do you think there is for that?
Dividend Dollars's avatar
@fatalglytch there could be significant risk with. Take the 2008 crisis for example, the stock went from a high of $75 to a low of $17. That’s a massive drop. Freight was hurt back then. Surprisingly, freight was hit even harder during the pandemic since everything was shut down, and Cummins went from $185-$101, so they are not as sensitive as they used to be, but it is still something to watch. For now, retail data and job data are still relatively strong and the Fed is working hard at avoiding a large recession. If the fed can manage their soft landing and the consumer stays strong, Cummins and the freight industry should have no issue here.
Gelila's avatar
Great article!! Thank you for the insight
Dividend Dollars's avatar
@gelila thanks for the compliment!
Good insight into Cummins and their future prospects. I can see them growing in the future as well with the growth in population, infrastructure, and shipping. If they are able to successfully implement their transition to electric and other sustainable options. They also have strong options in hydrogen and natural gas, which are great gas alternatives for fleets.
Dividend Dollars's avatar
@shultz yeah population growth, continued world development, and progress in green power put them in a pretty attractive position
Mitch Reid's avatar
Great post! EVs and sustainable energy solutions are the future, so it's definitely a good move by Cummins to get on the ground early and establish themselves as a key player in that field. Hopefully they'll reap even greater profits as the world relies more on what they're investing in.
Dividend Dollars's avatar
@mitchmatey thanks for reading! Being an early mover definitely has its advantages and Cummins did not dwell long on that decision
Totally makes sense that Cummins is the way to go and has such potential for growth while maintaining its reputation for innovation and quality.
Dividend Dollars's avatar
@rox not many other high-power solutions are looking towards a green future! This has a huge potential for them
Dividend Kid's avatar
🔥🔥🔥
Wow! Very informative, glad I read this love the details.
Dividend Dollars's avatar
@ian69 glad it was helpful!!
Always important to understand the other side of the coin when it comes to EV plays. $CMI sounds really interesting, and I may need to add it to my watchlist!
Dividend Dollars's avatar
@karbonkopy it’s definitely one to keep an eye one 👀
Amazing insight!!image

Jonathan Gunsolley's avatar
Great report! Very informative and was structured very well.
scarlet's avatar
Your stock pick IS the solution!!
Mark Stewart's avatar
The great report,I believe that Dodge put Cummins on the map with normal people. I think they are just going to continue to grow.
Dividend Dollars's avatar
@aznudist1 dodge has been offering Cummins upgrades to their trucks since 1989! Definitely helped to put their engines in front of a different market
Everyone has to continue to innovate to stay relevant! Great article
Dividend Dollars's avatar
@amgome17 they’ve innovated the Diesel engine for over 100 years, now they’re looking for the next best thing. They are quite good at staying relevant it seems! Thanks for the comment Andrew
Dale's avatar
Great insight! Excited to see what this stock does in the future!
Ainsley Cotter's avatar
I don't usually find an interest in investment and stock media, however, I found this post extremely well written, compelling and informative. Made the aforementioned information digestible to someone who is not well-versed in the investment field. Great job @dividenddollars
Dividend Dollars's avatar
@alcotter awesome compliment ainsley! I really tried to make it informative and easy to read so I’m very glad you noticed that
Exciting to see such a factual and informative article on something that can be so hard to understand!
Dividend Dollars's avatar
@margotmakesmoney ESG is a tough thing to wrap your head around sometimes! I’m glad you thought this was informative 🫡
Cade Williams's avatar
Interesting post, thanks for sharing! Insightful and well written.

Regarding your second point, about global food price, I believe you may have some figures wrong. Global food prices have surged 65% since the start of the Covid-19 pandemic and by 12% this year since the start of the Russian invasion of Ukraine, according to data from the United Nations' Food and Agriculture Organization. Russia and Ukraine are definitely a factor, but the increase is not as high as indicated in your post.
Dividend Dollars's avatar
@investmentnewb Thanks for your comment, and it looks like I misinterpreted the figure I was using. It came from this article from Forbes https://www.forbes.com/sites/phillipbraun/2022/03/31/how-the-russia-ukraine-war-has-compounded-the-global-food-crisis/?sh=728761074ae2. See the screenshot as well. A couple issues with my use of the source. That article was written on 3/21/22, food prices appear to have peaked at that time as a result of the war beginning. They also quote the 54% increase coming from mid 2020 levels to March 2022 levels. So if I were to use current figures, food prices are roughly flat as compared to just before the war. The reason they used mid 2020 levels was because that was the start of the covid pandemic, if we look at current price levels compared to that, the food index is still 40% higher. So it appears my presentation of the data was wrong, the pandemic has been the main driver of the increase in food prices, not the war. The war did lead to a substantial spike in prices earlier in the year that have now returned to pre-war levels, however current prices are still quite higher than the norm if we look back.imageimage


Dividend Dollars's avatar
@dividenddollars another correction, the article was written 3/31/22
Dividend Dollars's avatar
@dividenddollars @investmentnewb I appreciate the comment and have adjusted the post per our conversation 👍
Zero emissions?!? I’m game!
I don’t find these topics easy to hold my attention or understand how it all works. But surprisingly this was easy to understand and very informative. I hope other companies follow this path. Thanks for adding pictures for my dyslexia to get breaks lol
Dividend Dollars's avatar
@endcapitalism love to hear that it was digestible and interesting! Zero emissions is a noble pursuit, but it is also one that will become a requirement sooner than we think, other companies will have to follow suit and $CMI will help them do that
Thought provoking article. Worth a deeper look.
Dustin's avatar
Investing in climate-conscious companies is super important to me, so I’m excited to hear about this company. Great read, Tanner!
Conor's avatar
Well done, Dividend Dollars!

Kudos to you for highlighting the risks to your pick as well.

This company has almost everything I look for in a stock. The only two things I would like to see more insider ownership is 0.4% and less institutional ownership 83%.

Seems like a very safe investment that will chug along at 20% ROE year after year. I do expect to see their revenues increase due to the ever-increasing shift to higher fuel efficiency.

Well done!

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