Cummins' Valuation Stretched After AI-Driven Rally, Faces Cyclical Headwinds

What happened

Cummins Inc. has seen its stock surge 60% over the past year, driven by strong performance in Power Systems and Distribution segments benefiting from AI-related data-center demand, which offset declines in Engines and Components amid a weak North American truck market. Management's 2026 guidance projects modest 3-8% revenue growth and 17-18% EBITDA margins, but acknowledges risks from tariffs and uncertain truck recovery timing. The Seeking Alpha article rates Cummins 'hold' due to stretched valuation after this rally, while the DeepValue master report labels it a 'potential sell' with a base case value of $540, below the current $552.09 price. Recent Q3 2025 results highlight resilient margins, with Power Systems EBITDA at 22.9% and Distribution at 15.5%, but Engine margins compressed by 470 basis points year-over-year, reflecting cyclical pressures. Additionally, a $240 million impairment in the Accelera hydrogen segment signals ongoing challenges, casting doubt on the sustainability of current high multiples.

Implication

Cummins trades at rich multiples of 28.5x EPS and 12.7x EV/EBITDA, pricing in optimistic assumptions about sustained AI-driven power demand that may not materialize amid a multi-year truck downturn. The 'hold' rating from Seeking Alpha aligns with limited near-term gains, but the DeepValue report's 'potential sell' underscores deeper concerns over engine margin erosion and hydrogen-related impairments. Strong cash flow and a secure dividend provide some downside protection, yet the risk-reward profile is unfavorable at current levels, with more attractive entry points around $450 offering better margin of safety. Key monitoring items include 2026 guidance clarity, Power Systems backlog trends, and the outcome of Accelera's strategic review to assess future profitability. Overall, a patient, value-oriented approach is warranted, with potential for trimming positions or awaiting a valuation reset before considering increased exposure.

Thesis delta

The Seeking Alpha article corroborates the DeepValue report's view that Cummins is overvalued after its rally, but adopts a milder 'hold' stance versus the report's 'potential sell' rating. Both sources emphasize the resilience of Power Systems and Distribution against cyclical engine weakness, yet highlight persistent risks from tariffs, truck market softness, and hydrogen impairments, reinforcing a cautious investment thesis without significant shift.