Cummins Inc: Deep Dive With Power Systems Mgmt. Underscores Durability Of Data Center Tailwind

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Cummins Inc: Deep Dive With Power Systems Mgmt. Underscores Durability Of Data Center Tailwind

UpdateMlogistics / tariff driven inflation. Simply put, CMI's financial guidance and

2030 targets assume price/cost remains neutral to slightly positive and that

incremental margins are in the 25-30% range. Although this is below the

~43% incremental EBITDA margins Power Systems business has averaged

over the last three years, we would note that this is in-line with MS estimate

of ~28% average incremental margins between 2027-2030. Importantly,

given the current demand backdrop for power remains insatiable and

management's historical tendency to guiding conservatively, we view these

price/cost and incremental margin assumptions embedded in its 2030

financial algorithm as more likely than not to be indicative of upside risk as

opposed to being reflective of downside pressures.

4. Management views vertical integration as CMI's defining structural

advantage, and the one competitors cannot easily replicate. CMI is the

only vertically integrated power generator in the market, with the ability to

combine engine, alternator, radiator, controls and enclosure into a single

unit. Most competitors operate at the finished unit level and must source at

least some components externally, adding costs. Furthermore, its

Distribution unit adds balance of plant at a clip that is at least dollar-for-

dollar markup to the generator cost coming out of Power Systems. Not only

does this increase first fit sales, it also creates a recurring tail of customer

contact, service and aftermarket revenue that no other provider owns.

5. For Cummins, the US and China are distinct but complementary

opportunities, with the business well positioned in both. The 60Hz US