I recently posted a quantitative comparison of CMI with one of its competitors in the heavy machinery industry, arguing that it is undervalued despite having solid fundamentals. Here is a recap:
- Its 5-year historic growth rates for revenue and earnings are 9.70% and 21.87%, respectively, with low double-digit earnings growth expected over the next few years.
- The company has a great balance sheet, with debt/capital of 9.60%, debt/equity of 12.34%, a current ratio over 2, and ample interest coverage.
- The company has increased its dividend for 7 consecutive years, with an impressive 5-year dividend growth rate of 32.10% and a payout ratio of just 20%. This year's dividend increase was 25%.
- CMI has a P/E of 8.74 (its 5-year average P/E is 15.10), P/S of 0.91, and PEG of 0.76. Using a Dividend Discount Model with a below-average dividend growth rate of 10% and a discount rate of 12%, I calculate a fair value of $110 per share, which implies a 20% margin of safety at the current stock price.
I bought 15 shares of CMI at the price of $88.00 per share, giving me a 2.26% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $7.50, which will add a total of $30.00 to my annual dividend income. Cummins is now the 25th stock in my portfolio. I had been waiting for an opportunity to initiate a position in CMI below $90, so I was glad to get it today. The company reports its quarterly earnings on October 30, which could lead to more price action at the end of the month. If the stock is still trading around the current level in early November (when I will have new capital), then I would consider increasing my position.