Cummins currently trades at $620.51 per share and has shown little upside over the past six months, posting a middling return of 4%. The stock also fell short of the S&P 500’s 12.9% gain during that period.

Is now the time to buy Cummins, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Cummins Not Exciting?

We’re sitting this one out for now. Here are three reasons why there are better opportunities than CMI, plus one stock we’d rather own.

1. Revenue Growth Flatlining

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched 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 as its revenue was flat over the last two years.

2. Low Gross Margin Reveals Weak Structural Profitability

For industrial businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

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 24.8% gross margin over the last five years. That means Cummins paid its suppliers a lot of money ($75.16 for every $100 in revenue) to run its business.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Cummins has shown mediocre cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 5.4%, below what we’d expect for an industrials business.

Final Judgment

Cummins isn’t a terrible business, but it isn’t one of our picks. With its shares lagging the market recently, the stock trades at 19.4× forward P/E (or $620.51 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.

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