The past six months have been a windfall for Cummins’s shareholders. The company’s stock price has jumped 66.8%, setting a new 52-week high of $567.59 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

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

Why Is Cummins Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Cummins. Here are three reasons you should be careful with CMI and a 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 significantly as its revenue was flat over the last two years. We also note many other Heavy Transportation Equipment businesses have faced declining sales because of cyclical headwinds. While Cummins’s growth wasn’t the best, it did do better than its peers.

2. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Cummins’s revenue to stall, close to its 11.4% annualized growth for the past five years. This projection doesn't excite us and implies its newer products and services will not accelerate its top-line performance yet.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Cummins’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Cummins isn’t a terrible business, but it doesn’t pass our bar. After the recent surge, the stock trades at 23.4× forward P/E (or $567.59 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

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