Cummins Inc (CMI)

Conclusion

Cummins Inc is a US industrial company that makes diesel and natural gas engines, drivetrain and aftertreatment systems, power generation equipment and related parts and services, organised in five segments. At a price of 466.47 USD on 2026-11-09, its market capitalisation is 63.9 billion USD.

The verdict is fair. The fair value band runs from 346.39 to 519.58 USD with a midpoint of 432.99 USD, giving a margin of safety of -7.2% at the current price. The DCF gives 482.05 USD per share, and the fair value from historical multiples is 383.92 USD. Today's P/E of 19.3x sits above its ten-year median of 17.5x, and EV/EBITDA of 12.1x sits above its ten-year median of 10.0x. The reverse DCF implies growth of 8.6% a year, against a five-year revenue CAGR of 11.2% and a five-year FCF per share CAGR of 3.6%. The price therefore needs growth close to the company's recent revenue pace.

What holds the case up is the return on capital: ROIC of 19.9% against a WACC of 10.3%, and a ROIC minus WACC value of 9.6%. Financial strength is also solid, with an interest coverage of 13.9x and a net debt to EBITDA of 0.60x. The weakest numbers are the valuation premiums, notably P/S of 1.8x against a ten-year median of 1.4x, and estimate revisions for the current year, at -2.5% over 90 days with three downward revisions in the last 30 days.

Financial health

Financial strength is green, held up by the interest coverage of 13.9x, the net debt to EBITDA of 0.60x, the current ratio of 1.74x and an Altman Z-score of 4.31, all assessed good. The quick ratio is 0.97 and the debt to equity ratio is 0.56 as of 2026-09-30. The Altman Z-score of 4.31 sits in the safe zone, and Cummins is a manufacturer, so the model applies as designed. Insolvency risk: low, about 0.4% by the estimate of the Ohlson model over one to two years, based on figures to 2025-12-31. This is an estimate, not a forecast of default, and it does not replace a review of the debt terms.

Earnings quality

Earnings quality is green. Free cash flow conversion is 104.3% on a trailing twelve-month basis, but only 67.2% on average over five years, so the recent conversion is above its longer-term pattern. The accrual ratio is -2.4%, which suggests that reported earnings are backed by cash. Free cash flow after stock-based compensation is 3.46 billion USD; the company does not report its stock-based compensation, so the share of revenue is not available. The share count fell at a five-year compound rate of -1.4%, which points to buybacks. The Piotroski score is 6 out of 9 and the Beneish M-score of -2.51 is read as unlikely to signal manipulation. Over the last eight quarters the company beat estimates four times and missed four times, with an average surprise of 4.0%. Current-year estimates were revised down by 2.5% over 90 days, while next-year estimates changed by -0.8% and imply growth of 17.5%.

Profitability

Profitability is green, supported by ROIC of 19.9% against a WACC of 10.3%, and by the operating margin of 12.0%, which is above its ten-year median of 11.4%. The gross margin is 25.9% against a median of 24.7%, and the net margin is 9.3% against a median of 8.7%. Operating margin stability is 17.6%, a measure of how much the margin moves from year to year. The five-year median ROIC is 19.0%. ROE is 24.9%, but the DuPont split shows that leverage plays a part: a net margin of 8.4%, an asset turnover of 0.99 and an equity multiplier of 2.75x. The high ROE therefore rests partly on the balance sheet, so ROIC is the more reliable measure of returns on capital.

Growth

Growth is green. Revenue compounds at 6.3% over three years, 11.2% over five years and 5.8% over ten years. EPS compounds at 10.7%, 11.3% and 10.1% over the same periods. Revenue grew in six of the last ten years. Free cash flow per share rose at 32.8% over three years, but only 3.6% over five years and 9.3% over ten, so the recent three-year surge is not the long-run pattern. Next-year EPS growth expected by analysts is 17.5%, which is above the long-run record and depends on the estimates holding.

Valuation

Valuation is yellow, with the verdict fair. The price is 466.47 USD and the margin of safety is -7.2%, because the fair value midpoint of 432.99 USD sits below the price. Against their ten-year medians, the P/E is 19.3x against 17.5x (a premium of 10.1%), EV/EBITDA is 12.1x against 10.0x (a premium of 20.2%), P/FCF is 18.5x against 18.2x (a premium of 1.7%), P/S is 1.8x against 1.4x (a premium of 31.4%), and P/B is 4.8x against 3.9x (a premium of 23.2%). The DCF uses a discount rate of 11.05% and a growth rate of 11.2% for the first stage, with 2.5% as terminal growth. It gives 482.05 USD per share, and the terminal value makes up 50.0% of it. The fair value from historical multiples is 383.92 USD. The fair value is an estimate built on fixed assumptions, including a 5% equity risk premium and capped growth, and is not a price target. The free cash flow yield is 5.4% and the earnings yield is 5.2%. The dividend yield is 1.8%, with a forward yield of 2.0% and a payout of 32.7% of free cash flow.

Risks

The main risk is that the premium multiples do not hold. A P/S of 1.8x against a median of 1.4x, or an EV/EBITDA of 12.1x against 10.0x, leaves little room if growth slows to the 8.6% implied by the price. Falling estimates would also weigh: current-year revisions are negative, and three of the four recent revisions were downward. A decline in the ROIC from 19.9% toward the 10.3% WACC would remove much of the value case. The Piotroski score of 6 and the mixed earnings surprises show some variability in results. Because the DCF relies on the terminal value for half its result, small changes in the long-term growth or discount rate assumptions would move the fair value. Stock-based compensation is not reported, so its effect on earnings cannot be measured here. This analysis has no debt maturity schedule and no revenue by segment, so it cannot judge refinancing risk or which of the five segments drives growth.