Does Cummins (CMI) Make for a Suitable Value Investment?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Cummins Inc. CMI stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Cummins has a trailing twelve months PE ratio of 18.7. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.5.

If we focus on the long-term trend of the stock the current level puts Cummins’ current PE above its median over the observed period (which stands at 15.5x), with the number having risen rapidly over the past few months. Hence, we could infer that the stock is slightly overvalued in this respect, especially in light of its historical trend.

Further, the stock’s PE compares unfavorably with the Zacks Auto sector’s trailing twelve months PE ratio, which stands at 12.4. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.

Nevertheless, we should also point out that Cummins has a forward PE ratio (price relative to this year’s earnings) of 17.3 – lower than the current level. So, it is fair to say that a more value-oriented path may be ahead for Cummins stock in the near term.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Cummins has a P/S ratio of about 1.6. This is higher than the Zacks Auto sector average, which comes in at 0.7x right now too.

CMI is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Cummins currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Cummins an apt choice for value investors.

What About the Stock Overall?

Though Cummins might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of C and a Momentum score of B. This gives CMI a Zacks VGM score—or its overarching fundamental grade—of B. (You can read more about the Zacks Style Scores here >>).

Meanwhile, the company’s recent earnings estimates have been trending upward lately. The current quarter has seen nine estimates go higher in the past sixty days compared to none lower, while the full year estimate has seen 10 upward revisions and no downward revisions in the same time period.

This has had a small impact on the consensus estimate though as the current quarter consensus estimate has risen by 0.8% in the past two months, while the full year estimate has inched up 0.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Cummins Inc. Price and Consensus

Cummins Inc. Price and Consensus | Cummins Inc. Quote

This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.

Bottom Line

Cummins is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. It forms a part of the Zacks Automotive - Internal Combustion Engines industry which ranks among the Top 42% out of more than 250 Zacks classified industries.

In fact, the industry has clearly outperformed the broader market over the past year, as you can see below:

Moving ahead, Cummins expects to witness a growing trend in its truck and construction products’ demand, along with growth in global mining customers, which will have a positive impact on its sales figure. The company is also developing a Class 7 heavy-duty electric truck having a 140 kWh battery pack, to cater bus and commercial truck operators. Additionally, Cummins is poised to benefit from its business expansions in China and acquisitions and partnerships in North America.

However, challenging market conditions, currency headwinds and high warranty costs might dent the financials of Cummins.

So, value investors might want to wait for the company’s price to correct downwards a bit first before taking a position in the name. But, once that happens, the stock could be a compelling pick.

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