Cummins' data center backup power tailwind is further confirmed; Morgan Stanley reiterates Overweight

Overview

This report is a Morgan Stanley company research report on Cummins Inc, centered on an in-depth discussion with Jenny Bush, President of the Power Systems Business Unit. The report focuses on data center backup power demand, Power Systems capacity expansion, diesel and natural gas engine line flexibility, the moat created by vertical integration, and data center market opportunities in the U.S. and China. The conclusion is constructive: the analyst believes market concerns about the sustainability of diesel backup generation demand have been overly discounted, and that Cummins' 2030 data center sales target remains conservative.

Core views

The core views are as follows. First, data center backup power demand remains strong, and Cummins is taking orders for delivery in 2028. Second, execution risk around the 20GW capacity addition has declined, because the expansion will largely be completed within existing plants, while early procurement of processing equipment and in-house production of key bottleneck components help reduce supply chain constraints. Third, the production lines are broadly fuel-agnostic and can shift between diesel and natural gas engines according to demand. Fourth, vertical integration capability is a structural advantage for Cummins that is difficult for competitors to replicate. Fifth, the shift to 800V DC architecture will not eliminate demand for backup generation, and BESS is more likely to be a complement rather than a substitute for diesel backup power.

Analysis framework

The report uses in-depth management interviews, the Morgan Stanley ModelWare estimation framework, capacity ramp paths, price/cost assumptions, incremental margin analysis, and market structure comparisons to assess the medium-term quality of growth in Cummins Power Systems. On valuation, it references a base-case P/E multiple of roughly 25x EPS, justified by the truck business being near a trough stage and by the long-term tailwinds benefiting Power Systems and Distribution from AI-related power demand.

Methodology notes

• Sell-side earnings modelMorgan Stanley ModelWare

  An earnings, valuation, and scenario framework based on Morgan Stanley research estimates and consensus data.

  The report notes that, unless otherwise stated, metrics are based on the Morgan Stanley ModelWare framework, with some data sourced from Refinitiv Estimates or Morgan Stanley Research estimates.

• Valuation methodP/E multiple on base case EPS

  Approximately 25x P/E on base-case EPS.

  The report argues that the valuation multiple is above the historical 11-18x range, reflecting the truck cycle being near a trough and the long-term trends in AI-related power supply businesses.

• Operating model2030 Power Systems earnings algorithm

  Price/cost and incremental margin assumptions embedded in the 2030 target.

  Management assumes price/cost remains neutral to slightly positive and incremental margins are 25%-30%; the report views these assumptions as relatively conservative, implying upside risk.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CMI.N

  Core covered name

  Strengths

  Has advantages in Power Systems, Distribution, and vertically integrated manufacturing, and benefits from demand for data center backup power.

  Weaknesses

  Still exposed to truck cycles, emissions regulations, non-road markets, and price competition risks.

  Comparison

  Compared with some competitors, Cummins can integrate engines, alternators, radiators, control systems, and enclosures, while Distribution can also add BoP and aftermarket revenue.

  Risks

  If competitive capacity expansion leads to pricing pressure, execution delays, or slower data center demand, upside to earnings could be limited.

• Power Systems Business Unit (PSBU)

  Primary business benefiting from data center backup generation

  Strengths

  Order visibility extends into 2028, the path to incremental 20GW of capacity is clear, and production lines can support both diesel and natural gas.

  Weaknesses

  Capacity expansion still depends on large processing equipment, bottleneck components, and supply chain lead times.

  Comparison

  Incremental EBITDA margin over the past three years was about 43%, above the 25%-30% assumption in the 2030 target.

  Risks

  Pricing opportunities for diesel gensets may be more limited than in the past, requiring reliance on contract escalation clauses and value-based pricing to sustain price/cost.

• Distribution Business Unit (DBU)

  Amplifies Power Systems sales and creates a tail of service revenue

  Strengths

  Can add at least an equivalent amount of BoP value on top of Power Systems equipment revenue, while also generating customer touchpoints, service, and aftermarket revenue.

  Weaknesses

  The U.S. market is more fragmented, more regulated, and slower to energize, making execution more complex.

  Comparison

  The U.S. is served more through Distribution channels, while China is served more directly by Power Systems.

  Risks

  If approval or construction timelines for U.S. data center power supply slow down, realization of incremental Distribution revenue may be delayed.

• BESS

  Complementary product in the power stack

  Strengths

  Well suited for load following, short-term fluctuation management, and peak shaving; Cummins already has products from about 200kWh to 2,280kWh and is developing a 5MW platform.

  Weaknesses

  Storage duration is typically only 2 or 4 hours, making it unsuitable for true long-duration backup power.

  Comparison

  More likely to compete with aeroderivative gas turbines and natural gas reciprocating engines, rather than directly replacing diesel backup generation.

  Risks

  If battery storage duration and cost see major breakthroughs, the long-term backup power mix could change.

Key data

• Incremental capacity20GWExpansion is planned within the existing manufacturing footprint; the production lines are broadly fuel-agnostic and can support both diesel and natural gas engines.
• Order visibilityOrders for 2028 deliveryCummins is still taking orders for 2028 delivery in large product lines, and the current backlog is still mainly diesel.
• 4MW natural gas engine timelinePilot orders in 2H27, limited production in 2028, and full-scale ramp beginning in 2029Management says the product has not yet entered backlog orders but is expected to progress according to milestones.
• Incremental margin assumption25%-30%Assumption range in the 2030 target; below the roughly 43% average incremental EBITDA margin achieved by Power Systems over the past three years.
• Morgan Stanley estimated average incremental margin for 2027-2030About 28%Broadly consistent with management's 25%-30% range.
• Data center sales targetMore than $9B by 2030The report believes this target remains conservative and emphasizes the '+' in the target.
• China JV growthUp 84% in 1Q26 and up 68% in 1Q25Viewed as evidence of continued strength in China's data center backup power market.
• BESS product rangeAbout 200kWh to 2,280kWh; 5MW platform under developmentBESS is suited to short-term fluctuations and peak shaving, serving more as a complement within Cummins' power stack portfolio.
• Target price record$752The latest record in target price history is 752 on 2026-05-05.

Impact & implications

From an investment perspective, the report reinforces Cummins' positioning as a beneficiary of data center backup power demand and AI power infrastructure. If the 20GW capacity addition is released on schedule, price/cost remains neutral to slightly positive, and demand in the U.S. and China stays robust, Power Systems and Distribution could continue to drive earnings upgrades and valuation re-rating. The report also suggests that the market's feared substitution risks from 800V DC architecture and BESS are, in the near term, more about configuration changes and complementary opportunities than direct disruption to demand for diesel backup power.

Risks

• Additional capacity from competitors could suppress pricing for diesel gensets.
• Further changes in 2027 emissions regulations could create uncertainty.
• Accelerating OEM vertical integration could weaken Cummins' external supply and systems integration advantage.
• If the non-road vehicle market comes in below expectations, it could weigh on overall earnings.
• If the truck recovery pace in 2026 is unfavorable, it could affect the contribution from cyclical businesses.
• The 20GW capacity expansion depends on processing equipment, bottleneck components, and supply chain execution; delivery delays could affect the revenue ramp.

What to watch

• Power Systems orders and capacity throughput.
• Progress on equipment installation, in-house bottleneck components, and factory ramp-up for the incremental 20GW of capacity.
• Delivery against the 4MW natural gas engine roadmap: pilot orders in 2H27, limited production in 2028, and full-scale production in 2029.
• Changes in data center construction, energization speed, and demand from major cloud providers in the U.S. and China.
• Whether price/cost remains neutral to slightly positive, and whether incremental margins stay at 25%-30% or higher.
• Whether the shift to 800V DC architecture only affects alternator configuration without weakening demand for backup generation.
• The pace of BESS adoption in short-duration peak shaving and backup power architectures.