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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