Tuesday, February 23, 2016

Seeking Alpha: Cummins And The Cyclical Overcorrection Conundrum

We all knew that Cummins (NYSE:CMI) was a cyclical stock (unless you're new to investing and this was your first stock … in which case, 'surprise!'), but one of the trickiest parts of evaluating cyclical stocks is correctly estimating/guessing the length and depth of those cycles. The sell-side has dutifully taken its whacking stick to its fair value estimate for this truck engine and components manufacturer, with the average target price down from $155 last spring to around $98 today, but that strikes me as overdoing it.

To be sure, Cummins is definitely at risk of share loss in its core truck engine market, and likewise at risk of finding its components business misaligned with the market trends. Moreover, it's entirely reasonable for a fair value to decline when the near-term prospects worsen and those revenues and profits are pushed out into future years. Still, if Cummins can manage to average just 3.5% revenue growth over the next decade and move its FCF margin closer to 8%, a fair value of around $120 seems fair today.

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Cummins And The Cyclical Overcorrection Conundrum

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