Cummins Inc. Equity Valuation and Analysis

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Profitability Analysis Profitability analysis is composed of six ratios that measure Cummins efficiency in generating a profit. These various ratios include gross profit margin, operating expense, net profit margin, asset productivity, return on assets, and return on equity. The first three are all measures operating efficiency, a factor of profitability that attempts to reach a given level of sales with minimum associated costs. The latter three measure the revenue or profit productivity of resources utilized by Cummins. Profitability analysis provides insight to how efficiently the company is employing resources and mitigating costs to produce a profit. Profitability Analysis for Cummins 2002 2003 2004 2005 2006 Gross Profit Margin 17.85% 17.84% 19.91% 22.04% 22.84 Operating Expense 15.48% 15.25% 13.46% 13.03% 12.93 Net Profit Margin 1.40% 0.79% 4.15% 5.55% 6.29% Asset Productivity 1.21 1.23 1.29% 1.44 1.52 Return on Assets 1.70% 0.98% 5.36% 7.99% 9.58% Return on Equity 8.79% 4.66% 21.75% 26.33% 23.40 Profitability Analysis for Caterpillar 2002 2003 2004 2005 2006 Gross profit margin 24.84% 25.56% 25.77% 26.92% 28.83% Operating expense ratio 18.27% 18.14% 16.91% 16.50% 16.97% Net profit margin 3.96% 4.83% 6.71% 7.85% 8.52% Asset turnover 0.62 0.62 0.70 0.77 0.82 Return on assets 2.44% 3.01% 4.72% 6.06% 6.95% Return on equity 14.58% 12.11% 27.25% 33.85% 51.57% - 48 -
In summation, all measures of profitability have considerably increased and improved in almost every consecutive year. This can be attributed to three dominant factors: (1) management’s focus on creating investor value through higher profits and lower expenses using programs such as Six Sigma and (2) expanding into high growth related markets, such as South East Asia and the Middle East and (3) a rising economic demand for the industry throughout the entire five year period. Gross Profit Margin 35.00% 30.00% 25.00% 20.00% 15.00% Cummins Caterpillar 10.00% 5.00% 0.00% 2002 2003 2004 2005 2006 Cummins 17.85% 17.84% 19.91% 22.04% 22.84% Caterpillar 24.84% 25.65% 25.77% 26.92% 28.83% The gross profit margin is the percentage of which revenues exceed the direct costs associated with the revenue. This ratio is affected by the premium Cummins’ charges, the industry structure and product offered, and the cost efficiency of the firm’s production. Gross profit margins for the entire industry - 49 -
Page 1 and 2: Cummins Inc. Equity Valuation and A
Page 3 and 4: Investment Recommendation: Overvalu
Page 5 and 6: industry. With few buyers and many
Page 7 and 8: to different structured firms, so w
Page 9 and 10: Cummins Inc. is classified as a mem
Page 11 and 12: Industry Structure and Profitabilit
Page 13 and 14: Another key factor that plays into
Page 15 and 16: The threat of substitute products i
Page 17 and 18: Strategies for Creating a Competiti
Page 19 and 20: Cummins has the potential to attrac
Page 21 and 22: accounting policies recognized by C
Page 23 and 24: Warranty Provisions in Relation to
Page 25 and 26: 22% of sales outstanding, this redu
Page 27 and 28: can result in the plan being over o
Page 29 and 30: inventories, it is a proper account
Page 31 and 32: We can also look at the expense man
Page 33 and 34: Net Sales/ Net Accounts Receivable
Page 35 and 36: Net Sales/ Warranty Liabilities 45.
Page 37 and 38: lower than Caterpillars. Changes in
Page 39 and 40: Pension Expense/SG&A 0.15 0.10 0.05
Page 41 and 42: transferred to different accounts t
Page 43 and 44: efficiency ratios go down steadily
Page 45 and 46: The Accounts Receivable Turnover 8.
Page 47: management’s inability to accurat
Page 51 and 52: The operating expense ratio compare
Page 53 and 54: able to grow their earnings by an a
Page 55 and 56: Return on Assets 12.00% 10.00% 8.00
Page 57 and 58: illion in 2006. Net income increase
Page 59 and 60: Cummins is well-positioned to repay
Page 61 and 62: Debt Service Margin 6.00 5.00 4.00
Page 63 and 64: dividend policy and choose to retai
Page 65 and 66: The PP&E turnover is a measurement
Page 67 and 68: SGR & IGR Analysis IGR & SGR 25.00%
Page 69 and 70: 2005 to 2006 to forecast a more rat
Page 71 and 72: to support this assumption is that
Page 73 and 74: CUMMINS INC. AND CONSOLIDATED SUBSI
Page 75 and 76: Balance Sheet By forecasting the ba
Page 77 and 78: CUMMINS INC. AND CONSOLIDATED SUBSI
Page 79 and 80: Cash flows from operation activitie
Page 81 and 82: Valuation Analysis There are a vari
Page 83 and 84: Trailing Price to Earnings (2006) T
Page 85 and 86: Price Earnings Growth Due to a nega
Page 87 and 88: taking the average of a historical
Page 89 and 90: they will not be able to issue debt
Page 91 and 92: Sensitivity Analysis g Observed Pri
Page 93 and 94: Analyst Recommendation Through a ca
Page 95 and 96: Value Weighted Cost of Equity 72 Mo
Page 97 and 98: Residual Income (RI) 1 2 3 4 5 6 7
Page 99 and 100:
AEG 1 2 3 4 5 6 7 8 9 10 Termina 20
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