Episode Details

Cummins Inc. (CMI) Q2 2026 — Reported Aug 4, 2026 pre-open for the quarter ended June 30, 2026. Revenue $9,457M, +9.4%, a Q2 record, BEATING the $9.31B consensus. Diluted EPS $6.73 vs $7.17 expected - a 6.1% MISS, the first in five quarters. EBITDA $1,653M, 17.5% of sales, DOWN from 18.4%. FY2026 revenue guidance RAISED to +10-13% from +8-11%. Prior close $648.85; the stock sat at $613.26 (-5.5%) when this episode was recorded. Cummins posted a record quarter and RAISED guidance - and the stock fell 5.5% on a 44-cent EPS miss. Almost nobody reported that 43 of those 44 cents were a tax true-up and an incentive-compensation accrual, and that the accrual exists BECAUSE Cummins just guided to a record year. The operating business did not miss. THE CALL: HOLD (3/5, THE MISS WAS NOISE - THE PRICE IS NOT) — base-case value ~$525.0 vs ~$613.26 today. KEY METRICS: - CALL: HOLD 3/5 - fair value ~$525 vs $613.26 (-14%). We are NOT bearish on this quarter; we think the tape misread it. We are bearish on the price the market was already paying - CMI DOUBLED in ten months into this print, from a $361.59 close on Aug 4 2025 to $727.59 on Jun 25 2026. - THE MISS, LINE BY LINE: consensus $7.17, actual $6.73, gap $0.44. Company-stated: $29M / $0.21 per share of unfavourable DISCRETE TAX items (tax rate 25.1%); a year ago discrete items were FAVOURABLE by $0.02, so the YoY swing is $0.23. Our sizing of the incentive comp: SG&A $779M -> $893M, +14.6%, vs revenue +9.4%; at the revenue rate SG&A would be $852M, so $41M excess, $31M after tax = $0.22. $0.21 + $0.22 = $0.43 of $0.44. - POWER SYSTEMS IS THE STORY: revenue $2,255M, +19%, with the power generation product line $1,205M -> $1,536M, +27%, on data centre demand in the US, China and Asia Pacific. Segment EBITDA margin EXPANDED 22.8% -> 24.5% while Engine (13.8->12.5), Components (14.7->13.2) and Distribution (14.6->13.6) all compressed. Power Systems is 24% of sales and 33% of segment profit. June deal: Circe Energy gensets for a Texas HPC microgrid, deliveries 2026-2030. - THE GUIDE NEEDS A MARGIN INFLECTION: FY EBITDA guided 18.0-18.5% on revenue of $37.0-38.0B = $6,667-7,039M. H1 ex-specials was $3,142M on $17,855M (17.6%). That leaves $3,525-3,897M on $19.2-20.2B of H2 revenue - an 18.4% to 19.3% H2 margin, a 90-180bp step up from a first half that compressed. NOT A PRE-BUY: Engine North America grew just 1%; international grew 23% on Chinese construction. The NA growth came from Distribution (+13%) and Power Systems (+19%). - VALUATION: base FCF $3.6B (H1 already $1,370M; below run-rate - CMI printed $2.75B FCF in 2023, $279M in 2024, $2.39B in 2025). Grow 8% five years, fade to 4%, 2.5% terminal, at 9%: EV $75,347M less $3,771M net debt = $71,576M / 138.5M diluted = $517; 25/50/25 weighting $523. Bear $305, bull $752. Reverse DCF: $613.26 needs ~11% FCF growth for five years - the Street's own EPS path ($29.28/$34.20/$40.61) clears that easily; it only fails if cash conversion stays at ~50% of EBITDA. VS THE STREET: Buy - 27 buy/23 hold/1 sell, 51 analysts - averaging $779.70 (high $901, low $600). They see +27%; we see -14%. We DIFFER and are more CAUTIOUS. CIK 0000026172. What to watch: Bullish: a Q3 EBITDA margin at or above 18.4% - the low end of what the full-year guide mathematically requires - alongside continued Power Systems growth moves us toward $640. Bearish: Power Systems revenue growth decelerating below 10%, or Engine North America still flat in Q4, takes us to ~$400. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.