Summary

• The company designs, produces, and distributes a diverse array of power products, primarily for commercial vehicles.
• Demand in China fell substantially in 2022, with the risk that this could continue going forward due to changes within the country.
• Economic conditions could result in a decline in growth during 2023 as the requirement for transportation services falls.
• Cummins is showing opportunity for outperformance with its investment in Hydrogen and its acquisition of Meritor.
• Financials are attractive but not relative to other manufacturers. Our valuation suggests an upside of 3-11%, which does not compensate for risk.Investment thesis

  Our current investment thesis is:

  • Cummins is an attractive business with diversified revenue, large scale, and investments into high-growth areas.
  • The business is showing robust financials, although margins are soft relative to peers.
  • Hydrogen and the acquisition of Meritor should assist with driving growth. China remains an uncertain area following a weak FY22.
  • Cummins' valuation relative to manufacturing peers leaves little in the way of upside.
  An overview of Cummins

  Cummins Inc. (NYSE:CMI) is a leading global provider of engines, while also encompassing a range of complementary business segments. The company designs, produces, and distributes a diverse array of power products, including diesel, natural gas, electric, and hybrid powertrains, as well as associated components.

  Looking at the breakdown of Cummins' revenue, the company boasts impressive diversification, with no single segment accounting for more than 35%. The company's revenue has historically come mostly from conventional vehicular machinery but is generating greater revenue from electric and hybrid technologies as technology develops.

  Share price performance

  Cummins' share price has performed extremely well in the last decade, driven by continued top-line growth and a successful transition into non-fossil fuel energy sources. The transition is not yet complete, but the company has demonstrated its capability to offer green energy solutions, such as the development of hydrogen engines, alleviating investor concerns about a potential decline as the fossil fuel transportation industry is phased out.

  Investment thesis

  Both the economy and markets are facing uncertain conditions, with predictions of further difficulties to come. During such times, it is wise for investors to look for strong and durable businesses with robust demand, as a means of reducing volatility and potentially making gains. This analysis aims to examine whether Cummins fits this description.To assess the quality of the business, we will evaluate how the current economic situation has affected Cummins and what the impact may be over the next year. 

   acquisition of Meritor should assist with driving growth. China remains an uncertain area following a weak FY22.

  • Cummins' valuation relative to manufacturing peers leaves little in the way of upside.