Cummins Stock Looking More Tempting, But Cycle Risk Remains A Concern

 

Cummins (CMI) is a proven high-quality operator, with strong market shares across its key markets, strong return metrics (ROA, et al), and a good reputation on Wall Street. Still, the cyclicality of the business and the often high valuation Wall Street has been willing to give the shares have meant that it hasn’t always been the highest-quality stock – the long-term returns compare well to the S&P 500 and other industrials, but there have definitely been stretches of underperformance.

This is an interesting point in Cummins’ life cycle. Not only is there an unusual truck cycle still left to play out, with component shortages pushing Class 8 volumes into 2022, with a likely cyclical decline in 2023, but Cummins has the unenviable task of maintaining leadership in its core legacy markets while positioning and transitioning to new technologies and markets like hydrogen and electrification.

I like Cummins, and I see decent long-term return potential in the stock today, but timing cycles and cyclical stocks is never straightforward. The market almost always anticipates the turn (selling off while current conditions are good, buying while current conditions are still poor), but it’s possible there’s more risk/room on the downside, as the peak-to-now decline is only about half that of peak-to-trough moves in prior cycles.

 

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Cummins Stock Looking More Tempting, But Cycle Risk Remains A Concern