Cummins Inc. Equity Valuation and Analysis

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APPENDIX Financial Statement Ratio Analysis 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Liquidity Ratios Current Ratio 1.49 1.53 1.49 1.77 1.87 1.88 1.81 1.72 1.72 1.72 1.72 1.72 1.72 1.72 1.72 Quick Asset Ratio 0.83 0.81 0.84 1.02 1.13 0.79 0.85 0.93 1.02 1.13 1.25 1.39 1.54 1.71 1.89 Efficiency Ratios Inventory Turnover 7.50 7.06 6.65 6.59 6.29 6.46 6.64 6.77 6.85 6.87 6.93 7.00 7.07 7.14 7.21 Days 48.66 51.72 54.87 55.42 58.00 56.47 54.96 53.91 53.31 53.16 52.64 52.14 51.63 51.14 50.64 Receivables Turnover 7.27 6.78 7.27 6.97 6.43 6.37 6.24 6.06 5.83 5.55 5.29 5.05 4.81 4.59 4.37 Days 50.20 53.86 50.18 52.37 56.76 57.26 58.48 60.25 62.64 65.72 68.94 72.33 75.88 79.60 83.51 Working Capital Turnover 8.96 8.57 7.84 5.84 5.44 5.74 6.54 7.81 8.25 8.72 9.22 9.74 10.30 10.88 11.50 Profitability Gross Profit Margin 17.9% 17.8% 19.9% 22.0% 22.8% 24.0% 24.5% 25.0% 25.5% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% Operating Expense Ratio 15.5% 15.2% 13.5% 13.0% 12.9% 13.7% 13.7% 13.7% 13.7% 13.7% 13.7% 13.7% 13.7% 13.7% 13.7% Net Profit Margin 1.4% 0.8% 4.1% 5.5% 6.3% 7.1% 8.0% 9.1% 10.3% 11.6% 13.1% 14.8% 16.7% 18.9% 21.4% Asset Turnover 1.21 1.23 1.29 1.44 1.52 1.61 1.70 1.80 1.90 2.01 2.12 2.24 2.37 2.50 2.64 Return on Assets 1.7% 1.0% 5.4% 8.0% 9.6% 9.0% 8.5% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Return on Equity 8.8% 4.7% 21.8% 26.3% 23.4% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% 23.8% Capitol Structure Debt to Equity 4.18 3.78 3.06 2.30 1.44 1.33 1.25 1.19 1.15 1.11 1.08 1.05 1.02 1.00 0.97 Times Interest Earned 2.28 2.01 4.94 8.32 12.23 8.96 9.39 9.83 10.26 10.70 10.70 10.70 10.70 10.70 10.70 Debt Service Margin 1.40 3.26 1.78 4.94 5.12 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A - 94 -
Value Weighted Cost of Equity 72 Month Summary Output Regression Statistics Beta 1.4799914 Multiple R 0.5780813 Adj. R Squa 32.47% R Square 0.3341779 Ke 0.0505787 5.06% annual measure 0.1188898 Adj. R 0.3246662 Rf 0.0448903 Standard Er 0.0805332 MRP 0.0038435 0.05 0.0525 Observation 72 CoefficientsStandard Erro t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0% Intercept 0.0209325 0.0095112 2.200832 0.0310484 0.0019631 0.039902 0.0019631 0.039902 X Variable 1 1.4799914 0.2496896 5.9273262 1.052E-07 0.9820013 1.9779815 0.9820013 1.9779815 60 Month Summary Output Regression Statistics Beta 1.5722205 Multiple R 0.5580955 Adj. R Squa 29.96% R Square 0.3114706 Ke 0.0915028 9.15% Adj. R 0.2995994 Rf 0.043885 Standard Er 0.0839981 MRP 0.030287 Observation 60 CoefficientsStandard Erro t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0% Intercept 0.0190389 0.0109372 1.7407522 0.0870299 -0.002854 0.0409321 -0.002854 0.0409321 X Variable 1 1.5722205 0.3069391 5.1222562 3.603E-06 0.9578152 2.1866258 0.9578152 2.1866258 48 Month Summary Output Regression Statistics Beta 1.1334176 Multiple R 0.323834 Adj. R Squa 8.54% R Square 0.1048685 Ke 0.162324 16.23% Adj. R 0.0854091 Rf 0.0437458 Standard Er 0.078872 MRP 0.1046201 Observation 48 CoefficientsStandard Erro t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0% Intercept 0.0286745 0.0125958 2.2765119 0.0275153 0.0033205 0.0540285 0.0033205 0.0540285 X Variable 1 1.1334176 0.4882384 2.3214429 0.0247468 0.1506446 2.1161905 0.1506446 2.1161905 36 Month Summary Output Regression Statistics Beta 0.5124391 Multiple R 0.1526323 Adj. R Squa -0.54% R Square 0.0232966 Ke 0.0640343 6.40% Adj. R -0.00543 Rf 0.0448667 Standard Er 0.0685174 MRP 0.0374047 Observation 36 CoefficientsStandard Erro t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0% Intercept 0.0285839 0.0119091 2.4001631 0.0220094 0.0043816 0.0527862 0.0043816 0.0527862 X Variable 1 0.5124391 0.5690333 0.9005431 0.374166 -0.643976 1.6688539 -0.643976 1.6688539 24 Month Summary Output Regression Statistics Beta 0.8797089 Multiple R 0.2816152 Adj. R Squa 3.75% R Square 0.0793071 Ke 0.0792 7.92% Adj. R 0.0374574 Rf 0.0458625 Standard Er 0.0594897 MRP 0.037896 Observation 24 CoefficientsStandard Erro t Stat P-value Lower 95% Upper 95% Lower 95.0%Upper 95.0% Intercept 0.0224605 0.0128764 1.7443203 0.0950606 -0.004243 0.0491645 -0.004243 0.0491645 X Variable 1 0.8797089 0.6390413 1.3766073 0.1824834 -0.445582 2.2049994 -0.445582 2.2049994 - 95 -
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Cummins Inc. Equity Valuation and A
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Investment Recommendation: Overvalu
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industry. With few buyers and many
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to different structured firms, so w
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Cummins Inc. is classified as a mem
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Industry Structure and Profitabilit
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Another key factor that plays into
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The threat of substitute products i
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Strategies for Creating a Competiti
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Cummins has the potential to attrac
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accounting policies recognized by C
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Warranty Provisions in Relation to
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22% of sales outstanding, this redu
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can result in the plan being over o
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inventories, it is a proper account
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We can also look at the expense man
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Net Sales/ Net Accounts Receivable
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Net Sales/ Warranty Liabilities 45.
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lower than Caterpillars. Changes in
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Pension Expense/SG&A 0.15 0.10 0.05
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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 and 48: management’s inability to accurat
Page 49 and 50: In summation, all measures of profi
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: Analyst Recommendation Through a ca
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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