Should I buy Cummins shares in October 2021? Here’s my price prediction

By: Stanko Iliev
Stanko Iliev
Stanko dedicates himself to providing investors with relevant information they can use to make investment decisions. He loves the… read more.
on Sep 24, 2021
  • Cummins shares didn't perform well last several weeks
  • Cummins continues to face significant constraints in the supply chain
  • There is no clear trend for the upcoming weeks

Cummins Inc (NYSE: CMI) shares didn’t perform well last several weeks as the company continues to face significant constraints in the supply chain.

Fundamental analysis: Cummins continues to face significant constraints in the supply chain

Cummins is an American multinational corporation that manufactures and distributes engines, filtration, and power generation products. The company sells its products in more than 190 countries, and its business has proven improvements throughout the second quarter of 2021.

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Total revenue has increased by 58.7% Y/Y to $6.11 billion in the second fiscal quarter, while the GAAP EPS was $4.10 (beats by $0.05). Cummins expects revenue for the 2021 fiscal year to be between 20% and 24% higher versus the 2020 fiscal year.

The EBITDA should be in the range of 15.5% to 16.0%, and it is important to mention that Cummins expects to return more than 70% of operating cash flow to shareholders in 2021 in the form of dividends and shares repurchases.

“Strong demand across many of our key markets drove continued sales growth, particularly in North America, and resulted in solid profitability. The strength of the order board reflects robust underlying demand in many of our markets which is remarkable considering the challenges and uncertainty we faced during this same period last year,” said Chairman and CEO Tom Linebarger.

Despite this, the Delta variant of the coronavirus, together with further new variants, especially ones that might not be stopped by existing vaccines, still poses downside risks. Cummins also continues to face significant constraints in the supply chain, the main parts are semiconductor chips, but the company has also seen some constraints as it relates to actuators, wiring harnesses, various sensors blocks, and head castings, really coming across the board.

J.P.Morgan sees potential risks for the upcoming quarters mainly due to inflation and covid concerns; still, the company’s management expects some easing of the costs in the fourth fiscal quarter. Cummins estimates that for the 2021 fiscal year, the incremental logistics costs should be around $295 million and continues to navigate the situation as best as possible.

Cummins shares are not a strong buy currently, but this is a company that investors should have on their watch list. Cummins trades at less than eleven times TTM EBITDA, and with a market capitalization of $31.8 billion, shares of this company are fairly valued.

Technical analysis: There is no clear trend for the upcoming weeks

Data source: tradingview.com

Cummins shares have weakened from their record highs above $270, and if the price falls below $200 support, it would be a strong “sell” signal. On the other side, if the price jumps again above $240 resistance, it would signal trading shares, and the next target could be around $250.

Summary

Cummins’s business has proven improvements throughout the second quarter of 2021, but the company continues to face significant constraints in the supply chain. Cummins expects revenue for the 2021 fiscal year to be between 20% and 24% higher versus the 2020 fiscal year, and with a market capitalization of $31.8 billion, shares of this company are fairly valued.

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