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Insider Selling at Cummins (CMI): Time to Exit the Stock?

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Recent insider activity at Cummins Inc. (CMI - Free Report) has raised questions among investors about the future direction of the stock. Sharon Barner, the company's vice president and chief administrative officer, recently sold 4,780 shares at an average price of $300.35 per share, as per a SEC filing on Aug 19. Does this signal a concern about the company's prospects and should you reevaluate your position in the stock?

Cummins' Performance and Valuation

Cummins has had a good run on the bourses, with the stock up 26% year to date. It has also outperformed its peers like BorgWarner (BWA - Free Report) , PACCAR (PCAR - Free Report) and Caterpillar (CAT - Free Report) . CMI stock has moved up 3.2% since the second-quarter earnings report on Aug 1 after its earnings and revenues topped estimates as well as increased year over year.

YTD Price Performance Comparision

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In the trailing four quarters, it exceeded earnings estimates twice for as many misses.

Cummins Inc. Price and EPS Surprise

Cummins Inc. Price and EPS Surprise

Cummins Inc. price-eps-surprise | Cummins Inc. Quote

From a valuation standpoint, Cummins’ current price-to-earnings ratio of 14.23 is lower than the auto sector’s 16.20 but higher than its five-year median value of 12.77. CMI currently has a Value Score of B.

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How is Cummins Positioned for the Remainder of 2024?

Cummins has raised its full-year guidance, buoyed by its strong second-quarter performance. The company now expects total revenues to be down 3% to flat, an improvement from the earlier forecasts. EBITDA is projected to be between 15% and 15.5%, compared with the previous guidance of 14.5% to 15.5%.

However, there are some concerns. The second half of 2024 is expected to be weaker, particularly in the North America truck market. While Cummins has raised its forecast for the North America medium-duty truck market, the outlook for the heavy-duty truck market remains bleak, with a projected year-over-year decline of 7-12%. Furthermore, Cummins expects engine shipments for pickup trucks in North America to decline 5-10% year over year.

Meanwhile, the company’s Distribution revenues are projected to rise 5-10%, driven by stronger power generation markets.  Power Systems revenues are expected to grow 3-8% with improved EBITDA margins. However, Cummins expects 2024 revenues from its Components segment to decline 9-14%, with EBITDA margins slightly narrowing to 13.7-14.2%. The separation of the Atmus Filtration business is anticipated to negatively impact year-over-year performance.

In its Accelera segment, which focuses on electrification, Cummins has lowered its full-year sales guidance due to a slower-than-expected energy transition. The segment's operating loss is expected to be in the range of $400-$430 million this year, continuing a trend of losses in recent years amid heavy investments in products and technologies. This highlights the company's challenges in transitioning to sustainable technologies, which, while promising for the long term, are currently weighing on margins.

Long-Term Prospects in the Face of Short-Term Woes

Cummins is experiencing rising capital expenditures due to investments in new products and capacity expansion. While this supports long-term growth, it strains near-term finances. Capex in 2023 surged to $1.2 billion and is expected to stay high in 2024, between $1.2 billion and $1.3 billion. Increasing R&D and SG&A costs further put pressure on margins.

Despite near-term challenges, there are several factors that support Cummins’ long-term growth narrative. The company's leadership in engine production, its impressive product portfolio and its strong geographic diversification position it well for future growth. Moreover, Cummins is making significant strides in electrification through partnerships like Amplify Cell Technologies, which will boost U.S. battery production, and its collaboration with Isuzu to launch a new 6.7-liter engine for the Japanese market and a battery electric powertrain for the North American market by 2026.

Cummins' commitment to returning value to shareholders is also noteworthy. The company boasts an “A” credit rating from S&P and has consistently returned nearly 50% of its operating cash flow to shareholders through dividends and share repurchases. In July 2024, Cummins raised its dividend for the 15th consecutive year, underscoring its commitment to rewarding shareholders.

What Should Investors Do With CMI Stock?

While insider selling can sometimes be a red flag, Sharon Barner's sale of shares may not necessarily indicate a lack of confidence in the company's future.

From a fundamental perspective, Cummins remains a strong company with a solid long-term outlook. However, the second half of 2024 presents some uncertainties, particularly in the North America truck market and the Accelera segment's performance. Investors should weigh these short-term challenges against the company's long-term growth prospects and its commitment to shareholder returns.

The Zacks average price target of $317.08/share suggests a nearly 5% upside for the stock from the current levels.

CMI Price Targets

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Given the fact that the valuation is not stretched and there seems to be room for further gains, we think investors should retain the stock for now and wait for a better exit point.

Cummins currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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