Cummins Initial Coverage: Data Center Demand + Engine Recovery Catalyzes, Target Price 700 USD

Overview

Bernstein initiates Cummins (CMI.US), believing the company is at the convergence of multiple catalysts: traditional engine business bottoming out and rebounding, surge in data center backup power demand, Accelera narrowing losses, and potential asset disposal. Although short-term valuation partially reflects recovery expectations, institutions still favor the catalyst path within the next 12 months, granting Market-Perform rating, target price 700 USD.

Core views

Demand Side: North America heavy truck market recovery exceeds expectations, the company raises its 2026 industry sales guidance separately by 5 percentage points to Heavy Trucks +10%, Medium Trucks +20%, and expects moderate early buying in the second half. Supply Side: Engine business expands capacity by adding a third shift, management hints at further upside; Power Systems achieves 19% growth driven by data center demand (power generation business +28%), management plans to continue expanding capacity to meet stronger demand. Profitability Side: Company fully raises 2026 guidance, Engine revenue growth guidance increased from 6% to 9.5%, EBITDA margin improves 25 basis points to 13%; Power Systems revenue growth guidance increased from 15.5% to 16.5%, EBITDA margin improves 100 basis points to 25.5%. Asset Side: Accelera (new energy business) losses narrowed from -$438 million to -$285 million, institutions believe there is possibility of spin-off or sale, forming an additional catalyst.

Analysis framework

Institutions use Sum-of-the-Parts (SOTP) valuation method: - Segment businesses into Power (data center backup power, etc.) and RemainCo (traditional engine + distribution + Accelera) - Grant Power business 2027 35x PE (high growth, high barriers) - Grant RemainCo 16x PE (cycle recovery but limited growth) - Combined target price 700 USD, corresponding to 2027 22x overall PE

Methodology notes

• Valuation MethodSOTP Segmented Valuation

  Value each business segment with different growth prospects separately and then sum them up

  Grant high PE to high-growth segments (such as data center power), grant low PE to traditional cyclical segments, avoiding distortion from a single valuation multiple

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Determine industry prosperity through supply-demand indicators such as North America heavy truck sales and data center construction

  Institutions use North America Class 8 truck sales as leading indicator for engine business demand, use data center investment as driver for power business demand

Asset mapping & comparison

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

• Cummins Inc (CMI.US)

  Initial coverage subject, benefiting from data center power demand, truck recovery, and cost improvements

  Strengths

  Power Systems leads share in data center backup power field; Engine business has cost pass-through capability; Accelera losses narrowing

  Weaknesses

  Traditional engine business still affected by truck cycle; Accelera continues to drag overall profitability in short term

  Risks

  North America truck sales fall short of expectations; Data center construction slows down; New energy business loses money beyond expectation

Key data

• 2026 Engine Revenue Growth Guidance9.5%Increased by 350 basis points compared to previous guidance
• Power Systems 2026 Revenue Growth Guidance16.5%Increased by 100 basis points compared to previous guidance
• Accelera 2026 Loss Guidance-$285 millionSignificantly narrower than -438 million in 2025
• 2027 Overall EPS Expectation32.25 USDCorresponds to 22x PE

Impact & implications

Institutions believe Cummins is at a turning point of traditional business recovery plus new business growth: short term see North America heavy truck inventory restocking and data center construction, mid-term see product upgrade premium brought by EPA27 emission standards, long term see value release from Accelera asset disposal. However, current valuation already partially reflects recovery expectations, need to watch management's statement on capacity expansion plans at May 21 Investor Day.

Risks

• North America heavy truck sales recovery falls short of expectations
• Data center construction progress slows down
• New energy business losses exceed expectations
• EPA27 emission standard implementation delayed

What to watch

• Management statement on capacity expansion plans at May 21 Investor Day
• North America heavy truck monthly sales data
• Data center customer order progress
• Accelera potential spin-off or sale progress