In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)
Weighted Average Cost of Capital (WACC)
FCFF Growth Rate (g)

Cummins Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Year	Value	FCFF_t or Terminal value (TV_t)	Calculation	Present value at 12.16%
0¹	FCFF₀	2,938
1	FCFF₁	3,130	= 2,938 × (1 + 6.52%)	2,791
2	FCFF₂	3,327	= 3,130 × (1 + 6.30%)	2,645
3	FCFF₃	3,530	= 3,327 × (1 + 6.08%)	2,502
4	FCFF₄	3,737	= 3,530 × (1 + 5.86%)	2,361
5	FCFF₅	3,948	= 3,737 × (1 + 5.65%)	2,224
5	Terminal value (TV₅)	64,046	= 3,948 × (1 + 5.65%) ÷ (12.16% – 5.65%)	36,085
Intrinsic value of Cummins Inc. capital				48,607
Less: Debt (fair value)				6,375
Intrinsic value of Cummins Inc. common stock				42,232

Intrinsic value of Cummins Inc. common stock (per share)				$297.71
Current share price				$291.14

Based on: 10-K (reporting date: 2023-12-31).

¹ See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Cummins Inc., cost of capital

	Value¹	Weight	Required rate of return²	Calculation
Equity (fair value)	41,300	0.87	13.61%
Debt (fair value)	6,375	0.13	2.73%	= 3.74% × (1 – 26.94%)

Based on: 10-K (reporting date: 2023-12-31).

¹ US$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 141,856,847 × $291.14
= $41,300,202,435.58

Debt (fair value). See details »

² Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (48.30% + 22.60% + 21.30% + 22.50% + 20.00%) ÷ 5
= 26.94%

WACC = 12.16%

FCFF growth rate (g) implied by PRAT model

Cummins Inc., PRAT model

	Average	Dec 31, 2023	Dec 31, 2022	Dec 31, 2021	Dec 31, 2020	Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense		375)	199)	111)	100)	109)
Net income attributable to Cummins Inc.		735)	2,151)	2,131)	1,789)	2,260)

Effective income tax rate (EITR)¹		48.30%	22.60%	21.30%	22.50%	20.00%

Interest expense, after tax²		194)	154)	87)	78)	87)
Add: Cash dividends on common stock		921)	855)	809)	782)	761)
Interest expense (after tax) and dividends		1,115)	1,009)	896)	860)	848)

EBIT(1 – EITR)³		929)	2,305)	2,218)	1,867)	2,347)

Loans payable		280)	210)	208)	169)	100)
Commercial paper		1,496)	2,574)	313)	323)	660)
Current maturities of long-term debt		118)	573)	59)	62)	31)
Long-term debt		4,802)	4,498)	3,579)	3,610)	1,576)
Total Cummins Inc. shareholders’ equity		8,850)	8,975)	8,474)	8,062)	7,507)
Total capital		15,546)	16,830)	12,633)	12,226)	9,874)
Financial Ratios
Retention rate (RR)⁴		-0.20	0.56	0.60	0.54	0.64
Return on invested capital (ROIC)⁵		5.98%	13.70%	17.56%	15.27%	23.77%
Averages
RR	0.43
ROIC	15.25%

FCFF growth rate (g)⁶	6.52%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

¹ See details »

2023 Calculations

² Interest expense, after tax = Interest expense × (1 – EITR)
= 375 × (1 – 48.30%)
= 194

³ EBIT(1 – EITR) = Net income attributable to Cummins Inc. + Interest expense, after tax
= 735 + 194
= 929

⁴ RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [929 – 1,115] ÷ 929
= -0.20

⁵ ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 929 ÷ 15,546
= 5.98%

⁶ g = RR × ROIC
= 0.43 × 15.25%
= 6.52%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value₀ × WACC – FCFF₀) ÷ (Total capital, fair value₀ + FCFF₀)
= 100 × (47,675 × 12.16% – 2,938) ÷ (47,675 + 2,938)
= 5.65%

where:

Total capital, fair value₀ = current fair value of Cummins Inc. debt and equity (US$ in millions)
FCFF₀ = the last year Cummins Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Cummins Inc. capital

FCFF growth rate (g) forecast

Cummins Inc., H-model

Year	Value	g_t
1	g₁	6.52%
2	g₂	6.30%
3	g₃	6.08%
4	g₄	5.86%
5 and thereafter	g₅	5.65%

where:
g₁ is implied by PRAT model
g₅ is implied by single-stage model
g₂, g₃ and g₄ are calculated using linear interpoltion between g₁ and g₅

Calculations

g₂ = g₁ + (g₅ – g₁) × (2 – 1) ÷ (5 – 1)
= 6.52% + (5.65% – 6.52%) × (2 – 1) ÷ (5 – 1)
= 6.30%

g₃ = g₁ + (g₅ – g₁) × (3 – 1) ÷ (5 – 1)
= 6.52% + (5.65% – 6.52%) × (3 – 1) ÷ (5 – 1)
= 6.08%

g₄ = g₁ + (g₅ – g₁) × (4 – 1) ÷ (5 – 1)
= 6.52% + (5.65% – 6.52%) × (4 – 1) ÷ (5 – 1)
= 5.86%

Cummins Inc. (NYSE:CMI)

Present Value of Free Cash Flow to the Firm (FCFF)

Intrinsic Stock Value (Valuation Summary)

Weighted Average Cost of Capital (WACC)

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

FCFF growth rate (g) implied by single-stage model

FCFF growth rate (g) forecast