CUMMINS INC (CMI) stock intrinsic value fair value estimate & owner earnings analysis

Cummins designs and builds diesel and natural gas engines, generator sets, truck components (transmissions, axles, brakes, aftertreatment) and related parts, sold through its own engine and components segments, a large company-owned distribution network, and a Power Systems segment. Its earnings come from three things: heavy- and medium-duty truck engines (cyclical, with PACCAR the largest customer and its four largest engine customers making up 31% of 2025 sales), power generation equipment (currently the fastest-growing area, driven by data centers), and a steady aftermarket parts and service business. Its Accelera unit (batteries, electrolyzers, fuel cells) loses money. How we measured earning power. We started with cash from operations, removed the swings caused by receivables, inventory, payables and accrued expenses, deducted stock compensation ($93M in 2025) as a real cost, and deducted only the part of capital spending needed to keep the plants running (about $1.2B a year; growth spending was zero in 2025 because sales fell slightly). Because we value the whole business first and then subtract debt, we then add back cash interest paid (about $308M in 2025) to get the cash the business produces before its lenders. On that basis the business produced roughly $1.7B in 2016, $1.9B in 2020, $2.3B in 2022, $2.7B in 2024 and $3.5B in 2025. The 2023 figure is excluded because it carries the roughly $2.0B charge for the U.S. emissions settlements on pick-up truck engines (about $1.9B was paid in the second quarter of 2024; because we strip out accrued-expense swings, the cost is counted once, in 2023). We anchored on the median of 2022, 2024 and 2025, about $2.68B, because the company is now materially larger (sales of $28B to $34B versus $20B to $24B in 2017 to 2021) and the earlier years describe a smaller business. Cash flow grew 29% in 2025, but the base case assumes only 3% in year 1, so no reversal of a slowdown is being assumed. In the first half of 2026 operating cash flow was $1.81B versus $0.78B a year earlier, but net income was slightly lower ($1.65B versus $1.78B), so most of that jump is working capital timing and we did not raise the level on it. Base case: $357 per share. The business produces $2.68B before its lenders and grows 3% a year for ten years to about $3.6B, then holds flat. What is credited: the 3% is well below the company's own record (cash flow before lenders grew from $1.7B in 2016 to $3.5B in 2025, and sales from $17.5B to $33.7B, including through the 2020 downturn). Data center demand extends six to eight quarters, and 2026 capital spending of $1.35B to $1.45B is planned for capacity expansion. What is left out: any recovery in North American truck demand (the company itself expects it to stay weak in the first half of 2026), any margin expansion, share gains, new products, and any growth beyond year 10. Value of the business is about $56.5B, less about $2.3B for the roughly 4% of profit belonging to minority partners, less about $4.7B of net debt, leaving about $49.5B, or $357 on 138.7M diluted shares. Bull case: $557 per share. Cash flow before lenders holds at the 2025 level of $3.46B, which was achieved even with North American truck demand weak, and grows 5% a year for ten years to about $5.6B, still below the 8% a year the business has delivered over the past decade. Data center demand already visible six to eight quarters out and the expansion capital being spent are the named levers. Business value about $85.4B, less about $3.4B minority share, less about $4.7B net debt, leaving about $77.3B. Bear case: $197 per share. A heavy-duty truck downturn lands while data center power generation demand normalizes (orders are largely open purchase orders that can be cancelled on short notice) and Accelera keeps losing money (it took $458M of charges in the second half of 2025 and the company expects continued near-term operating losses). Cash flow before lenders falls to and stays at about $2.0B, roughly 6% of 2025 sales, below every year of the past decade (7.9% to 10.9%), and never grows. Business value about $33.3B, less about $1.3B minority share, less about $4.7B net debt, leaving about $27.3B. The company can carry its debt comfortably even in this case: cash interest was $308M against $2.0B of cash flow before lenders. Debt. Total borrowings at June 30, 2026 were about $7.7B (senior notes and debentures maturing between 2027 and 2098, commercial paper of $348M and short-term bank loans of $459M). Only about $155M falls due in the next twelve months and roughly $0.5B to $0.9B a year over the following three years, against $3.9B of cash and short-term investments. We held back $1.5B of cash as needed to run a global business and counted the remaining $2.4B against debt. Most of the notes carry coupons below 6% (for example $650M at 2.6% due 2050 and $1.0B at 5.45% due 2054), so we reduced the debt figure by about $0.6B, giving net debt of about $4.7B. Cummins had a similar debt load at the last analysis, so the change in value here is not driven by leverage. What changed since the last analysis. Our prior estimates ($87 bear, $245 base, $355 bull) discounted at a higher rate, measured earnings differently and did not separately charge minority partners. Under the current approach, which discounts every company at a flat 6%, the numbers move up. The news itself was mixed: power generation strength and 2025 cash flow of $3.5B are better than earlier in the cycle, while the Accelera write-downs, the decision to stop new electrolyzer business, and the weak North American truck outlook are worse, and we kept the anchor below the 2025 peak for that reason. What would make this wrong. A sharp fall in data center orders, a deep and lasting truck downturn, tariff costs the company cannot pass on, or further penalties under the emissions settlement agreements (any further non-compliance would bring stipulated penalties). Proposed U.S. rules that would repeal greenhouse gas engine standards would make the emissions credits Cummins holds ($127M at year-end 2025) worthless, a non-cash write-off. Accelera charges are added back as non-cash, but repeated write-offs of that unit are the reason the bear case assumes continued losses there. Checks we ran on our own case: the bear cash flow of $2.0B is below the lowest margin in the decade, and the first-half 2026 net income (down 7%) did not support raising the base above the 2024 to 2025 level. The 2025 cash flow could not be reconciled to management's 2026 outlook beyond the qualitative statements in the annual report, which gives no numerical earnings guidance, so we did not use guidance to set the level.