Should You Buy Cummins (CMI) After Its Earnings?
Back in July I showed you 4 Reasons To Buy Cummins (CMI) stock to Depression Proof Your Portfolio.
Today, I want to answer the question – Should You Buy Cummins After Its Earnings?
Here’s a brief recap of what I said then about avoiding the stock before we get to today’s article…
If you want to read the past article on Cummins in full you can do so using the link above.
4 Reasons To Buy Cummins To Depression Proof Your Portfolio
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in…
- 3 Reasons To Avoid American Airlines Stock
- The Most Dangerous Stock In The World
- 3 Reasons To Avoid Wynn Resorts Stock
- 4 Reasons To Avoid Norwegian Cruise Lines Stock
Today, I want to show you 4 Reasons To Buy Cummins To Depression Proof Your Portfolio.
Cummins (CMI) is a leading manufacturer of diesel engines use in commercial trucks. And it also supplies engines for railroad locomotives and diesel-powered electricity generators.
Based in Indiana it has a $25.6 billion market cap company and it pays a 3.1% dividend.
This is reason #1 to buy CMI to help Depression Proof Your Portfolio.
CMI’s 3.1% Dividend
Over the last decade CMI’s paid out a total of $30.12 per share in dividends.
At today’s share count of 154 million shares that’s equal to $4.64 billion paid out to shareholders in the last decade.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns huge profits. Which is reason #2 to buy CMI to Depression Proof Your Portfolio.
CMI Earns High Profits
Over the last decade it earned an average operating income margin of 10.5% per year on average.
I look for anything above 10% on a consistent basis so CMI surpasses this number.
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operation profit margins above 10%.
This makes CMI a great operating business.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 7.2% per year.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
CMI surpasses my thresholds on both important metrics and that make it an incredibly safe investment.
But these profits also allow another layer of safety in the amount of debt the company has which is reason #3.
CMI’s Low Debt Levels
With CMI being a multibillion company, you’d expect it to have debt.
And it does… But its debt levels are extremely low compared to its profits and the equity in the company. This makes CMI an even safer investment.
As of this writing its debt/equity ratio is 0.27. I look to invest in companies with numbers below 1 on this metric.
Because the lower debt levels the company has means the lower chance it has of going bankrupt. And this make it a safer company.
Generally, the more profits and cash flow the company produces the higher its debt levels can be without becoming problematic.
Another reason to consider buying CMI to Depression Proof Your Portfolio is because it’s cheap.
CMI Is Cheap
With the markets at or near all-time highs you’d expect a fantastic stock like CMI to be selling at an enormous valuation.
But it’s not.
As of this writing its P/E is 15.9.
And its P/CF is 10.6.
On both metrics I look to buy investments below 20 for them to be considered undervalued.
And CMI’s current valuations fall well below this number putting it into the cheap valuation category.
This means CMI stock offers you a margin of safety in investing terminology.
A margin of safety means you’re buying a safe investment… And this makes the investment even less risky.
If you’re looking for a solid, safe, stable, dividend paying, cheap, and enormously profitable investment to Depression Proof Your Portfolio – consider investing in Cummins.
This thesis to buy Cummins continued to play out on October 27th, 2020 after it released its most up to date quarterly earnings.
Revenue fell 11% in the year to year quarterly period to $5.1 due to the still ongoing negative effects the coronavirus has on Cummins business.
But even in the face of this, operating cash flows rose to $1.2 billion in the quarter which is a company record.
This is impressive and shows the resilience of Cummins business during these economic downturn.
Plus, it’s still cheap enough to buy too…
As of this writing its P/E is 20.9.
Its P/CF is 13.8.
Its forward P/E is 16.5.
On all three metrics, I look to buy investments below 20 to consider them undervalued.
These show that CMI is undervalued right now.
And this means buying its stock does give you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With CMI being undervalued it makes the investment safer.
Should You Buy Cummins After Its Earnings?
Back in July I showed you 4 Reasons To Buy Cummins To Depression Proof Your Portfolio…
And while it no longer looks like we’re headed for a Depression thankfully… You should still consider buying Cummins because it’s a great company that pays you a good and growing dividend, produces good profits and cash flows, and is also cheap.
Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.