Today we have a moderately speculative idea.: take stock of the manufacturer of internal combustion engines Cummins (NYSE: CMI), to earn on the growth of orders.
Growth potential and validity: 11% behind 12 Months; 9% per year for 10 years. All excluding dividends.
Why stocks can go up: we can expect an increase in demand for the company's products in the near future.
How do we act: take now for 233,77 $.
What the company makes money on
The company designs and manufactures engines, also takes care of their maintenance..
According to extremely detailed Cummins report, revenue is divided into five segments.
Engines — 41%. The company manufactures gas and diesel engines. Segment EBITDA margin - 15,39%. The revenue of the segment is distributed according to the directions as follows::
- 33% - heavy trucks;
- 25,75% – medium trucks and buses;
- 19,28% – vehicles for transporting passengers or small loads;
- 21,97% – transport for work in off-road conditions.
Spreading — 36%. The company sells engines and provides services for their maintenance. Segment EBITDA margin - 9,31%.
Components — 31%. These are spare parts and maintenance systems for machinery, which the company produces. Segment EBITDA margin - 15,95%.
Nutrition — 18%. The company is engaged in the production of generators and engines for sectors outside the transport of goods.. Segment EBITDA margin - 9,44%. The segment's revenue is distributed as follows:
- energy supplies — 59,68%. The company produces generators for power supply in a huge number of industries.: from rental and data centers to industry and oil and gas production;
- industry - 32,71%. These are gas and diesel engines for mining applications, sea transport, defense and railway industry;
- production of generators for the needs of the company, as well as those generators, what are sold under the brands Stamford and AvK, — 7,62%.
New energy — 0,36%. The company is engaged in the production and maintenance of power supply systems for transport, powered by hydrogen and electricity. This is the only unprofitable segment of the company: negative EBITDA there is almost 2,5 times the amount of revenue.
The total amount is higher here. 100%, because the indicated sales figures by segments also take into account the settlements between the segments themselves.
Geographic distribution of revenue:
- USA - 53,53%;
- China - 14,29%;
- India — 3,43%;
- other, unnamed countries - 28,75%.
Arguments in favor of the company
Gas to failure, he is invincible. The company posted excellent results in the last quarter.: revenue increased by 58,64%, and profit - by 117%, mainly due to operational performance. Increased business margins: gross margin - from 23,1 to 24,2%, and EBITDA - from 14,3 to 15,9%. At the same time, the market reacted to this news in almost no way., although the results were better than expected.
I believe, that we can take stock now pending, that investors will soon pay attention to the company. Moreover, she does not have a very high P / E — 15,71 - much lower, than companies, working in related industries, although Cummins has no full-fledged analogues in the USA.
Gas to failure, and we'll look there. Previously, we published a cycle of logistics investments: Knight-Swift, Schneider National, Skirt, J. B. Hunt Transport Services и C. H. Robinson. In these ideas, we talked in detail about the prerequisites for the logistics boom in the United States.. Analysis of the recent reports of these companies shows, that they are doing great, which means, we can expect an increase in orders for new trucks. And therefore, Cummins will also get something from this, since a significant proportion of its orders are formed by the logistics sector.
Wrecked. I'm very bad at dividend ideas, but I won't deny, that dividends often allow you to pump up quotes due to the influx of those, who is absolutely sure, that “money should work!». Cummins Paying 5,8 $ per share per year, what about the current share price 233,77 $ gives 2,48% per annum. It's not very much, but more than the average return on S&P 500 in 1,3% per annum. So it would be reasonable to assume, that dividend investors will not bypass the company. But this is just a support factor - mainly growth of Cummins shares is expected due to improved financial performance of the business.
Just Biden, just an incentive. The United States may soon adopt an infrastructure investment program for 550 billion dollars. If it happens, then there will be a great demand for heavy engineering services, which will support the "industrial" part of the company's business, The, that deals not only with engines for freight carriers and their maintenance. The effect of this on the company, however, will only be visible over a period of several years, therefore, first of all, we can expect a speculative growth in quotes because, that investors will be waiting for the flow of orders for Cummins. What if the program is not accepted?, then it's okay: the main emphasis in our idea is on the growth of carriers' investments in the renewal of fixed assets.
What can get in the way
Accounting. According to the latest report, at the company 13,185 billion dollars in arrears, out of which 6,604 billion needs to be repaid within a year. However, she does not have much money at her disposal.: 2,481 billion in accounts and 3,67 billion of counterparties' debts.
The company spends on dividends approximately 852 million per year - 38,55% from its profits over the past 12 Months. Considering the need to close debts and invest in business, there is a chance, that payments will cut. However, she is not very big, since the company recently increased these payments - and, I guess, Cummins management is aware that, what is he doing. Probably, the missing money will be borrowed or received, selling available securities.
And yet, a large amount of company debt cannot but worry now., when investors are mentally preparing for raising rates and rising prices for loans.
Expenses. The company expects, that the cost of transportation and logistics this year will increase by 55% compared to early forecasts - this may negatively affect reporting. Maybe, investors take into account this information and are in no hurry to take Cummins shares, to watch later, did these expenses greatly spoil the reporting.
Electric dreams of Pavlik Morozov. The establishment and its affiliated economists have already filled the entire information sphere with forecasts that, how electric transport will replace traditional. Even if there are no economic prerequisites for this, then the powerful lobby of "ethical investors" will intensively pump up quotes of companies, working in the field of clean transport.
See also, maybe, spoil the life of those, who works with internal combustion engines, как Cummins. Very likely, that in the near future Cummins will be unable to obtain a loan to invest in its core business at a reasonable rate of interest. May be, its shares will be ostracized by large institutional investors. Truth, she is already trying to appease the bloodthirsty gods of ESG by spending on her senseless and unprofitable "new energy" segment, but his share in the company's sales is negligible - so there are big doubts, that it will greatly improve her image.
Cummins periodically pops up in the news as an enterprise, which helps companies with developments in the field of using hydrogen for transport, and even participates in all sorts of projects in the field of "sustainable development". So that, maybe, Cummins will even encourage a clean energy pivot. But the threat of harassment of the company "for the environment" remains. For the same reason, I would not count on, what Cummins will buy: now investors encourage companies to develop clean energy - and punish for their unwillingness to engage in this development. In this paradigm, buying Cummins by someone bigger looks unlikely..
What's the bottom line?
You can take shares now for 233,77 $. Taking into account all the positive aspects, we can count on the return of shares within the next 12 months to the price 260 $, who asked for them back in June.
You can also take a risk and take stocks on 10 years: fundamentally it's a very good business. But this option seems to be more risky., than short term investment. Extrapolating from our current experience with increased ESG investing for the future, then I would be afraid, that the company has been harassed for "inconsistent with the party line" without regard to its business performance. Although I, certainly, would be happy to be wrong.
It will also not be superfluous to look at the company's website: there may be news about the reduction of dividends. This will help to quickly dump shares on the St. Petersburg Stock Exchange before, How will the market react to this news?.
