Although the Q4 results and outlook have Cummins (NYSE: CMI) shares moving lower in the wake of the release, the indications suggest the stock can move higher. Not only is the trend in the stock price still up, but that trend is supported by results and institutional activity and, to a lesser extent, the analysts. The analysts are the weakest link in this chain and present a potential catalyst. 

The most recent activity seen on Marketbeat.com’s analyst tracking tools is a price target reduction from Morgan Stanley at the end of January. That was a price target reduction to a level just above the current consensus, which assumes the stock is fairly valued. The sentiment is a firm Hold and is helping to support the price; the potential catalyst is a firming of sentiment and price action now the results are in. 

Cummins Powers Up For 0 Carbon 

Cummins, a manufacturer of diesel and natural gas engines and powertrains, is working hard to position for a carbon-free world. The takeaway is that efforts are working and resulting in strong sales that power investors a healthy dividend. The Q4 results have revenue at $7.8 billion and up 32.3% YOY at a company record.

The gains are driven by a 13% increase in organic sales that are supported by pricing actions and coupled with growth at Meritor as well. Meritor was acquired over the last year as part of the decarbonization effort and produced its own solid double-digit growth. The Meritor segment, a global supplier of components for specialty commercial vehicles, came in at 15.4% of the net revenue and helped drive strong results on the bottom line. 

The only bad news in the report is that margins contracted a little more than expected. The company's EBITDA margin came in at 14.2% due to acquisitional and divestiture-related costs but rose to a more acceptable 16.1% on an adjusted basis. So, while the adjusted $4.52 is up strongly from last year’s $2.73 to set a company record it is only in line with the expectation versus the top line strength and technically a miss. 

However, the Q4 margin weakness may be overlooked because the guidance is favorable. The company expects revenue growth to outpace the Marketbeat.com consensus at the low end of the range and for margins to expand. The margin expansion is minimal, about 100 basis at the EBITDA level, but enough to help widen the earnings and improve the outlook given the top-line strength.

Cummins Is Value And Yield For Industrial Investors

Cummins isn’t a deep value but, trading at 15X its earnings, it is fairly valued relative to the S&P 500, and it pays twice the yield. Caterpillar (NYSE: CAT), for example, trades at about the same value but only yields about 1.94%, which is still above the broad market average. Cummins aims to pay out about 50% of its earnings which means there is growth on the table. The current payout ratio is running at 40% of the consensus estimate, leaving plenty of room for future increases even without earnings growth.

The company is using the remaining cash flow to pay down acquisition-related debt, which is good news. Once that’s done, it can either move on to new acquisitions, accelerate the dividend increases or start buying back shares. 

The Technical Outlook: Cummins Pulls Back Into A Buy 

Cummins shares are down more than 1.0% following the Q4 release and set up for the next buying signal. The move marks a peak within an uptrend so a move down to the 30-day EMA near $240 should produce a bounce. In this scenario, the stock should resume the uptrend at that time and may move up to the $260 level or higher. The next target for really strong resistance is near $275 and it will probably take a change in analysts' sentiment to get it above there.