Cummins (CMI) Stock Could Be 36% Below Fair Value On Cash Flow

Cummins has given shareholders a powerful ride over the past few years, and the question now is whether the current US$517.40 share price is still aligned with the cash the business can generate. The focus for investors is not just where the stock has come from, but whether its cash flows can carry that valuation from here.

• Over the past 3 years the stock has returned 152.6%, which reflects a lot of trust in Cummins' ability to keep producing and growing cash flows to support that kind of move.
• The company runs a capital intensive engine and power solutions business. Future investment needs, margins and how smoothly earnings convert into free cash flow may all shape what its cash flows are worth today.
• If you'd rather focus on earnings, this one's for you. See what Cummins's 26.2x P/E says about the price.

The issue now is whether Cummins' current market price is justified by the intrinsic value suggested by its Discounted Cash Flow (DCF) estimate based on those cash flows.

If you want to test the same cash flow question across a broader set of ideas, compare Cummins with 28 high quality undervalued stocks.

Does Cummins Look Undervalued on Cash Flow?

The Discounted Cash Flow (DCF) model helps tie Cummins' share price back to the cash it is expected to generate. On the latest twelve month view, the group produced roughly $3.4b of free cash flow, and the 2 Stage Free Cash Flow to Equity approach then layers on a series of projected cash flows that extend into the mid 2030s.

Analysts feeding this model expect Cummins' free cash flow in dollar terms to grow from that base, with projections rising into the mid single digit billions before fading to steadier increases in the later years. Those streams are discounted back and compared with the current $517.40 price. On that basis, the Discounted Cash Flow (DCF) projections put Cummins' estimated intrinsic value substantially above the current share price. Find out what Cummins could be worth using our Discounted Cash Flow (DCF) estimate.

The Cummins Narrative: What Would Justify Today's Price?

Narratives pick up where that DCF puzzle leaves off by spelling out which combinations of Cummins' growth, profitability and earnings paths would need to play out for the shares to trade materially higher or lower than they do today. They sit on Simply Wall St's Community page. Rather than relying on a single output, each narrative lays out the assumptions behind its view of fair value so you can compare those expectations with future results as they are reported.

One of the top community narratives on Cummins: 42% undervalued

"The introduction of the HELM engine platforms with options for diesel, natural gas and hydrogen fuels can capture new markets and improve revenue and margins…"

Discover why this Narrative puts Cummins at 42% undervalued.

Before acting on Cummins' valuation, there is one more factor to weigh

Cash flows and price only tell part of the story. The people setting Cummins' priorities, and the way their rewards line up with your outcomes, can tilt the risk reward profile in a very real way. See who runs Cummins and how they are paid.

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