Cummins, Inc.

For this example, we choose Cummins Inc., listed on the New York Stock Exchange as CMI. We found interesting to analyze a company that´s turning to prioritize Hydrogen as fuel on their business prospects. Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide.

You can choose any company listed on the New York Stock Exchange for us to analyze.

We see our objective as an investor is to look at companies as a money making-machine. We put money in and we observe how it comes back. So we are going to look inside each company numbers to understand the source of that income, and take conclusions about its sustainability on time, and its attractiveness relative to its market price and risk.

We will look directly to the Earnings Yield. This is how much money we receive back in a year relative to the price we pay. What we could receive back from the company is called the Net Income, it's the cash left after all costs and taxes. The company may wish to distribute it as dividends, reinvest it on its business or buy back the shares that it once issue (good news for the shareholder because there will be less shares available to distribute future incomes). Any of these resolutions that the company may wish to make, should have similar effects on its stock price. We will give importance to the Net Income, necessary source of money previous to make any of these decisions.

Earnings Yield = (Earnings Per Share / Stock Price) * 100%

Earnings per share (EPS) is the portion of a company's profit that is allocated to each individual stock. 

EPS is calculated by dividing Net Income by Shares Outstanding.

Earnings Per Share = Net Income / Shares Outstanding

So, the Earnings Yield is a valuation metric that measures a company's profits relative to stock price, expressed as a percentage yield. Intuitively, how much money we receive on a given year, expressed as a percentage of what we pay for that wright. 

The average annual yield for our stock in analysis from year 1998 to 2023 is 6,21%. This is the annual historical average yield of the company that investors through the bidding of the stock market price, where capable of receiving after the company results. It´s a measure of risk support based on how much yield on average, market investors are capable/willing to take on this company.

As the Stock Price and the Net Income of the company on the last December 2023 balance, the Earning Yield is 2,16% behind the average. This is a pressure to lower the stock price looking to reverse to its mean. 

Taking on account historical Earning Yield, with December 2023 balance structure, the equivalent price for this yield to be accomplished should be USD 83,6 per share, being on reality USD 239,6.

Nevertheless, if we think this yield is attractive for us, then we must relativize its risk. On the following chart we see how from 2012 to the 2023 December balance, the company has been operating with less Equity. This on its sole, may not be that bad if the case we consider is that in which the return of the liabilities is higher than its cost/interest. Will see that is not our case.

We see that on last year balance the return of the Net Income over the Equity (ROE) was 2,3% and over all Assets (ROA = Equity + Liability) was 7,4%, considerably lower than their respective averages (ROE 17.98% and ROA 6.91%).

So, if the company is strategically moving to more liabilities in the search for more profits, it should be perceived on a higher ROE because we should be having more Net Income for unit of Equity. We see this is not the case, being a risk alarm as we are having less cash to cover more liabilities.

It is also interesting to see how much of the price we are paying for each stock is covered by the Shareholder Equity. This is a safeguard indicator because it is the money we should receive back in the case of the company liquidation. 

For our case on average from 1996 to the date, the 46% of the money we invest on this stock was guaranteed in this concept of Shareholder Equity. On last 2023 December balance, it was 23%.

You should compare Yield and Risk. Take on account that if you buy a United States Treasury Bond and you keep it till maturity, being a theoretically risk-free investment meaning that you will receive back 100% of the bond face value, you will get with actual yields around 5% annually. 

CMI as we saw, has a 2,16% Earning Yield on last year, with a 23% Book value per Share (what we theoretically receive back on the case the company goes out of business).

That is a balance of Risk vs Rentability we think you should look at if investing on this company.

Having less equity and less rentability over it, its alarming, and even more if we look at the Interest Coverage, measure of the ability of the company to pay its interest expenses. It is calculated by dividing the company's Earnings Before Interest and Taxes (EBIT) by its Interest Expenses. As we see, form 2012 to the date, this capacity is deteriorating because of the higher liability structure not compensated by higher returns. 

The Dividend Payout Ratio is the percentage of a company's profits that are paid out as dividends. A high ratio, and in this last year, more than 100% of the money made, implies that the dividend payments may not be sustainable.

The company is manifesting trouble to afford its Dividend payments, at the same time incurring on more Liabilities and less Returns. Consequently, at actual market prices, the Earnings Yield is coming down. We should see a lowering stock price dynamic for this rentalibity measure to reverse to its mean.