Monday, June 17, 2019

Cummins Well-Positioned For The Correction

Cummins (CMI) is enjoying the last few quarters of this heavy-duty truck-driven cyclical peak, but management is already preparing for a downturn in 2020 that will almost certainly lead to one year (maybe two) of negative comps in revenue, EBITDA, and free cash flow. Ex-North America demand and other businesses like Power could help soften the blow, but cyclicality is just part of the story and something that long-term investors need to accept.

I think valuation on Cummins is pretty reasonable today, and I don’t see it as particularly over-valued or under-valued. Certainly there is a risk that end-market demand will correct to a “weaker for longer” cycle than currently expected, but my bigger concern is just how markets tend to treat cyclical stocks; Wall Street is obsessed with growth and Cummins shares may well lag when the reality of the cycle starts showing up in the numbers, even though everybody knows it’s a cyclical company that goes through its ups and downs and still manages to generate strong cash flows and ROICs across the cycle.

Continue here:
Cummins Well-Positioned For The Correction

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