Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Is Cummins Making Money?

The venerable diesel maker Cummins (NYSE: CMI) surprised a lot of people by announcing a plan to make drive trains for all electric-vehicles. This naturally has a lot of investors wondering if Cummins is making money and if it is still a good investment?

These concerns are strengthened by Cummins’ declining revenues. Back in March 2015, the generator and engine maker reported revenues of $19.52 billion; that number fell to $18.69 billion in March 2016 and $17.81 billion in March 2017. This decline raises concerns about the sustainability of Cummins’ business.

A greater concern is the growing movement to ban diesel vehicles in parts of the world. Munich; BMW’s hometown, is the latest city to consider a ban on diesels, Reuters reported. Diesel is being targeted in the Bavarian capital because of nitrous oxide levels that violate European air quality ratings.

Smart Move or Desperate Measure?

Not coincidently Cummins announced plans to start making powertrains for all electric-trucks and buses in 2019 in a June 14 conference call, The Indianapolis Business Journal reported.

“We will be in the market with electrified products in 2019,” Cummins CEO Tom Linebarger said. Cummins expects to see a wide range of diesel powered vehicles and equipment including forklifts, earthmovers, farm tractors and transit buses switch to electric in the near future, The Journal reported.

Is this paradigm shift a smart move or a desperate measure for a troubled company? Cummins and one of its customers, Fiat Chrysler (NYSE: FCAU) have been accused of rigging emission test results to hide diesel pollution in a scam similar to the Volkswagen diesel scandal.

Cummins is Smart to Go Electric

Going electric is a very smart move for Cummins, because it opens new areas of business and might make up for lost diesel market share. Over the next decade there will be strong pressure to convert a wide variety of vehicles including buses, garbage trucks, dump trucks, snow plows, fire trucks and delivery vans from diesel to electric.

This will lead to strong demand from fleet customers including governments and giant delivery services like UPS and FedEx. There will also be pressure on large retailers like Kroger, Walmart, Amazon and Aldi to convert their semi-truck fleets (which are used for urban delivery) to electric.

That proves Linebarger is a very shrewd business person who is turning a potential loss of business into an opportunity. Instead of losing market, Cummins will be there with new products to meet demand and possibly find new customers such as Tesla Motors (NASDAQ: TSLA). Elon Musk has promised to demonstrate an electric semi-tractor this fall.

Building electric vehicles will also create new demand for Cummins’ generators. Contractors and other operators of electric-powered heavy equipment will need power or backup power. Operators of electric trucks and buses will also need backup power if the grid goes down.

Is Cummins a Value Investment?

All this will make many people wonder if Cummins is an electric vehicle value investment because it provides the components for electrics. It also has a lot of experience building generators and diesel-electric vehicles, which gives the company a leg up on new competitors like Tesla.

Cummins is a value investment right now because it is an unsexy company that makes money. Cummins reported a net income of $1.469 billion on March 31, 2017; up from $1.333 billion in March 2016, but down from $1.70 billion in 2015. That means it is making a lot of money.

Cummins meets another value criteria; it is a cash-rich company. It reported $1.467 billion in cash and short-term investments, $2.047 billion in cash from operations and a free cash flow of $271 million on March 31, 2017. All of that is supported by a profit margin of 8.63% and a diluted EPS number of 8.72.

The Value Hedge at Cummins

Cummins investors also made money with a 21.13% return on equity n March 31, 2017. They also took home a very juicy dividend of $1.025 a share on May 17, 2017. That was up from 97.5¢ a share on May 18, 2016.

Those numbers and the growth potential from electric vehicles make Cummins a really great investment. I conclude that it is fairly valued at the $158.91 a share it was trading at on June 16, 2017.

If you are looking for a great electric vehicle value investment, check out Cummins. It’s making a lot of money from its diesel business and has the potential to make a lot more from the electric vehicle market.

That makes Cummins a great way of hedging for the advent of electric vehicles (EVs). If EVs come Cummins will make a lot of money providing the powertrains for them, if they do not it still has a lucrative diesel business to fall back upon. Persons that want to make a bet on electric vehicles should ignore the money losing Tesla and invest in Cummins instead.