Cummins (CMI)

Engine manufacturer Cummins (NYSE:CMI) reported Q3 CY2025 results exceeding the market’s revenue expectations, but sales fell by 1.6% year on year to $8.32 billion. Its GAAP profit of $3.86 per share was 19% below analysts’ consensus estimates.

Company Overview

With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE:CMI) offers engines and power systems.

Heavy transportation equipment companies are investing in automated vehicles that increase efficiencies and connected machinery that collects actionable data. Some are also developing electric vehicles and mobility solutions to address customers’ concerns about carbon emissions, creating new sales opportunities. Additionally, they are increasingly offering automated equipment that increases efficiencies and connected machinery that collects actionable data. On the other hand, heavy transportation equipment companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the construction and transport volumes that drive demand for these companies’ offerings.

Competitors offering similar products include Caterpillar (NYSE:CAT), Deere (NYSE:DE), PACCAR (NASDAQ:PCAR), and Navistar (NYSE:NAV).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Cummins grew its sales at an impressive 11.4% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Cummins’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years. We also note many other Heavy Transportation Equipment businesses have faced declining sales because of cyclical headwinds. While Cummins’s growth wasn’t the best, it did do better than its peers.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Components and Engine , which are 28% and 31.3% of revenue. Over the last two years, Cummins’s Components revenue (axles, brakes, drivelines) averaged 11.6% year-on-year declines while its Engine revenue (diesel and gas-powered engines) averaged 2.2% declines.

This quarter, Cummins’s revenue fell by 1.6% year on year to $8.32 billion but beat Wall Street’s estimates by 5%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Cummins has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 24.6% gross margin over the last five years. Said differently, Cummins had to pay a chunky $75.43 to its suppliers for every $100 in revenue.

This quarter, Cummins’s gross profit margin was 25.6%, in line with the same quarter last year. Zooming out, Cummins’s full-year margin has been trending up over the past 12 months, increasing by 1.4 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Cummins’s operating margin has risen over the last 12 months and averaged 9.9% over the last five years. Its solid profitability for an industrials business shows it’s an efficient company that manages its expenses effectively. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Cummins’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Cummins generated an operating margin profit margin of 10.2%, down 2.2 percentage points year on year. Since Cummins’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Cummins’s remarkable 12.7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Cummins, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q3, Cummins reported EPS of $3.86, down from $5.86 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Cummins’s full-year EPS of $19.26 to grow 10.4%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Cummins has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.3%, subpar for an industrials business.

Taking a step back, we can see that Cummins’s margin dropped by 1.7 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Cummins’s free cash flow clocked in at $1.01 billion in Q3, equivalent to a 12.1% margin. This result was good as its margin was 7.6 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Cummins hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 17.9%, impressive for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Cummins’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Cummins reported $3.16 billion of cash and $7.26 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $5.81 billion of EBITDA over the last 12 months, we view Cummins’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $122 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Cummins blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its EPS missed. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 5.2% to $462 immediately following the results.

Updated: December 3, 2025 at 10:24 PM EST

Before deciding whether to buy Cummins or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Cummins’s business quality ultimately falls short of our standards. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s stellar ROIC suggests it has been a well-run company historically, the downside is its gross margins are lower than its industrials peers.

Cummins’s P/E ratio based on the next 12 months is 21x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $517.94 on the company (compared to the current share price of $506.16).