July 20, 2021
Cummins: The Company gearing up for zero-emissions future

I think we are all aware of the rapid growth in electric cars (running on batteries) as they gradually replace combustion engine cars on the roads. This cleaner transportation technology represents a move away from fossil fuels which is wonderful news for cutting emissions into the atmosphere. The not so good news is that batteries are in many ways not completely eco-friendly compared to hydrogen for example. Hydrogen Fuel cells make electricity on demand with only water as a by-product and have been touted as a clean vehicle option for decades, but high costs, durability and a lack of hydrogen fuel stations have limited their appeal and adoption. And while Elon Musk has harshly criticised hydrogen “fool cells” for years, grousing about their inefficiency relative to batteries, a growing number of manufacturers see significant potential for them, particularly as production of hydrogen made from renewable sources, rather than natural gas, becomes viable. The market is already awarding very high valuations to hydrogen fuel cell startups still years away from meaningful revenues as it’s clear that hydrogen really has some very clear advantages over batteries.

Global transportation is currently responsible for 16% of GHG emissions, with a significant portion from road transport. In Canada, 10.5% of these emissions come from freight transportation. In the US, this number increases to 23% stemming from medium- and heavy-duty trucks. It’s important to note that most of those trucks use polluting diesel engines.

A semi-truck powered by a Cummins fuel cell system

Zero-emission hydrogen fuel cell cars from Toyota, Honda, Daimler and Hyundai have been on the road for more than a decade, but the rise of battery-electric cars, championed by Elon Musk and Tesla, and a limited number of hydrogen fuel stations has made the technology less compelling for passenger vehicles. However, the lower weight and rapid refuelling time that hydrogen fuel cell power systems offer relative to batteries have made them increasingly appealing for heavy-duty vehicles. Multibillion-dollar plans are taking shape in that industry, led by Toyota, Hyundai, Daimler. Today I’d like to tell you about leading US large cap diesel engine manufacturer Cummins who has a significant ‘Rembrandt in the Attic’ in the form of its burgeoning hydrogen fuel business. What I am excited about is that this business is initially aimed at areas of the market where lack of hydrogen infrastructure isn’t a problem (trucks and trains) so growth is more near term than for many startups. I believe there is a real prospect of them becoming a key supplier in a range of hydrogen applications as further adoption takes place.

Pynk Comunity Cummings Research Report-MCap

Business Description

Cummins is the world-leading maker of engines for buses, trains, and medium-sized to heavy-duty trucks. It makes 1.2 million engines per year. Germany’s Daimler is number 2. In the US, in 2019, Cummins had a leading 34.8% market share, or 112,756 out of 323,225, according to a WardsAuto.com report. The picture worldwide is far more fragmented with Isuzu of Japan being a big player outside the US. Hino, also of Japan makes engines for their own trucks as does Daimler and others. Therefore CMI’s world share of the truck engine market - excluding China - is around just 6%. That sounds small but it is still as high or higher than any other maker and is an indication of the opportunity.


Cummins is gearing up for a zero-emissions future with big plans to supply hydrogen-electric power systems and electrolysers that make the clean fuel. And meanwhile its traditional core market of trucks, trains and buses is robust and recovering this year. The company laid out a comprehensive strategy in its recent “Hydrogen Day” presentation, covering its production of fuel cells, stationary power systems, fuel tanks and electrolysers to help companies make their own hydrogen. The range of applications is immense: Cummins is for example also testing hydrogen-powered big rigs, but expects both transit operators and steelmakers needing to lower their carbon emissions to be the best early markets, according to a Forbes article.

Everyone knows that we need to get out of carbon fuels. The question is when do the economics get right either because of regulations or other things? The economics are right for subsidized areas,” he says. “Trains, buses that’s where the action is because it’s point-to-point, which means you have a hydrogen fuelling station at this end, hydrogen fuelling stations at that end and you’re done. You don’t want a bunch of stations. You want high usage so that when you put this investment in you’re using a lot of the fuel. Chairman and CEO Tom Linebarger tells Forbes.

Prices and those Hydrogen Deniers

Source: Morgan Stanley © FT

Hydrogen is portrayed by some as expensive, but with all such things costs are coming down. Solar and wind energy was once expensive and is now cheaper than coal in many places, as an Our World in Data article shows. Thierry Lepercq, author of the book Hydrogène, le nouveau petrol (Hydrogen, the new oil) said this recently;

In five years, we’re expecting a price of $1 per kilo. Some manufacturers are announcing a price of $1.50 starting in late 2020.

There are two reasons for this price drop. First, in order to produce green hydrogen, you need access to completely clean electricity from renewable and cheap sources. From 2009 to 2019, the cost of electricity produced in solar power plants decreased ninefold to reach $40 per megawatt-hour, and wind energy dropped from $135 to $41 per megawatt-hour, according to a study by Lazard Bank published in late 2019.

And prices will continue to fall in the coming years, reaching $10 per megawatt-hour in 2025 with solar, which will automatically reduce the price of green hydrogen, predicts Lepercq.

The second reason is electrolysers – the machines that can transform water into hydrogen using electricity.

In recent years, the sector has gone from small pilot units – demonstrators with less than one megawatt of power – to industrial-scale projects that can reach 10, 20, and even several hundred megawatts, Xavier Regnard, analyst at investment bank Bryan Garnier & Co.

“This change in scale will lead to an industrialisation of the industry and a drop in prices.”

That means hydrogen powered trucks will soon hit the highway in ever growing numbers.

Refuelling Infrastructure being built

Crucially refuelling facilities will be needed. California is leading the US with refuelling stations. Canada has one of the most advanced hydrogen strategies in the world including trucking that is seen as “low hanging fruit” on the highway to a cleaner environment. To transition China to cleaner energy, Sinopec Shanghai Petrochemical plans to have 1,000 refuelling stations equipped with hydrogen by 2025, according to a Bloomberg article. Cummins is well-established in China. Hydrogen refuelling stations in Europe are expected to expand from 185 to 3,700 by 2030, and then on to 15,000 by 2040. Spain has announced a long term and strategic commitment to develop an extensive hydrogen fueling station network as part of its ambitious National Hydrogen Strategy, “Hoja de Ruta del Hidrógeno”. They plan to use "best-in-class technology to produce truly competitive green hydrogen from sunlight alone with zero emissions.” Japan and South Korea are also becoming hydrogen countries.

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Diesel Phase Out in Europe

In a potentially game-changing move, seven of Europe’s largest truck manufacturers – Daimler, Scania , Man (, Volvo, Daf, Iveco, and Ford – have signed a pledge to phase out traditional combustion engines by 2040, focusing instead on hydrogen, battery technology, and clean fuels.

Meaningful Move into Hydrogen

Hydrogen and fuel cells are not a fad at Cummins. Cummins started to get involved with hydrogen around 20 years ago but has put its foot down hard on the accelerator pedal by investing in a range of applications in recent times:

Our goal is to have the right products to meet customers’ needs and every point of the transition. Amy Davis, president of Cummins New Power Segment.

In September 2019, Cummins completed a $290 million deal to acquire Hydrogenics. The move made Cummins a leader in hydrogen fuel cell production. Investors delighted in the deal, sending CMI stock sharply higher.

Cummins’ new segment, New Power, which now includes investments in fuel cells, electric power trains, and hydrogen technology, completed its first full year in 2019. In its 2019 Sustainability Progress Report released on July 16, Cummins highlighted how this segment successfully launched electrified power trains in buses in North America last year. The company now has more than 2,000 fuel-cell installations across on and off-highway applications and is banking on these technologies to reduce greenhouse gas and emissions as part of its PLANET 2050 program.

In addition to acquiring Hydrogenics, Cummins also announced an investment in Loop Energy, a fuel cell electric range extender provider, and signed a memo of understanding with Hyundai Motor Company to collaborate on hydrogen fuel cell technology across commercial markets in North America.

Investment Case

It is clear that Hydrogen has the potential to be big business, but the opportunity has appeared to be years away, further away than electric cars for example. However, the opportunity is far more immediate in distinct sectors of transportation like heavy trucks and trains. This is exactly where Cummins operates. Unlike the hydrogen startups years away from meaningful revenues, we have the enticing prospect of buying into a growing hydrogen business being funded by the traditional diesel engine operation which is also in a recovery upswing. Additionally, the number of applications is diverse and growing: both for large-scale energy storage and industrial applications, there’s going to be a huge increase in hydrogen use in the years to come.

There will be as much hydrogen used in steel plants and in (oil) refining, as there will be in transportation. You’re not gonna solve those with batteries.

Cummins has very big ambitions for its hydrogen fuel cell business. Cummins projects it will have 15% market share and sees $400 million in revenue from hydrogen-making electrolysers in 2025. Electrolysers split water into hydrogen and oxygen using electricity and are part of the industry’s plan to make hydrogen from totally green-power sources, instead of with, say, natural gas. Using water and solar power to make hydrogen generates no carbon dioxide in the power generation or consumption process. The company’s vision: green hydrogen-powered fuel cell-powered trains, trucks and data centres.

Hydrogen technologies, particularly electrolysers, will be a fast-growing and increasingly important part of our business over the next few years. Chairman and CEO Tom Linebarger said during the company’s virtual Hydrogen Day

Electrolysers – the Science Bit

Almost all of the 70 million tons of hydrogen produced today uses power generated by natural gas, a fossil fuel. Electrolysis makes hydrogen by splitting water into hydrogen and oxygen. It is an electricity intensive process. Cummins plans to use wind, solar and hydroelectric sources to make hydrogen.

A 20-megawatt electrolyser system in Bécancour, Canada for French industrial gas supplier Air Liquide is nearing completion. Cummins claims it will be the world’s largest electrolyser capable of creating 3,000 tons of hydrogen a year using hydroelectric power.

Cummins uses both Proton Membrane Exchange (PEM) and alkaline technologies. One of the two DOE grants could bring a third option called a reversible fuel cell. The $2 million grant is to demonstrate the cost, performance and reliability of a so-called R-SOFC, which can split steam to separate hydrogen and oxygen.

More than 50 hydrogen fuelling stations globally use Cummins-developed electrolysers. The company has more than 2,000 fuel cell installations globally.

CMI’s growing electrolyzer business should support another cycle-over-cycle EPS opportunity for the company even if fuel cell adoption progresses slower than expected in global heavy-duty truck markets. Morgan Stanley analyst Courtney Yakavonis said in a research note.

Government Backing

In July, Cummins was also among the handful of companies to receive funding from the U.S. Department of Energy for hydrogen research projects. Cummins has every reason to expect continued government support for its hydrogen fuel cells. It recently received two grants from the U.S. Department of Energy. One is helping to pay for a Class 8 fuel cell demonstration truck Cummins is building with longtime partner Navistar Inc. The truck will be used for a year by Werner Enterprises in Southern California.

The DOE is just one source of funds. Germany plans to spend $9 billion on hydrogen infrastructure this decade. That includes 5 gigawatts of electrolyzer capacity by 2030. China and South Korea are also developing fuel cell and hydrogen production targets. South Korea’s Hyundai Motor Corp. has a joint venture with Cummins. The two are exploring how they can work together on fuel cells for heavy-duty trucks.

When Congress approved its $900 billion relief bill connected to the novel coronavirus on Dec. 21, it included a nice little provision to extend clean energy tax credits. The extension bodes incredibly well for companies producing hydrogen fuel and fuel cells for alternative energy vehicles. With President Joe Biden in office, it’s an odds-on bet those credits will be further renewed and even expanded as his administration tackles climate change and renewable energy development head on.

The action will of course run concurrently with the further development of an industry still in its initial stages of rapid growth.

This means that the company is a beneficiary more generally from a change in U.S. policies with the election of Joe Biden to replace Donald Trump as president. Biden is prioritizing policies that cut carbon emissions and promoting far greater use of electric vehicles to help tackle climate change, while Trump prioritized carbon energy production and eliminated tough fuel economy rules.

On the Rails

Source: Cummins

There is a clear opportunity in hydrogen fuelled trains as these go ‘point-to-point’ so are less hindered by the lack of hydrogen infrastructure. Relative to trucks, “trains run on fixed routes and require lower infrastructure in terms of hydrogen refuelling, this will be another key factor", Davis said.

In addition, support for public subsidies exists and the incremental cost to purchase a hydrogen train is lower than the cost of electrifying rail lines. All of these factors drive varied adoption rates, greater adoption in early years and applications such as trains and buses, with heavy-duty trucks falling farther out on the curve.

However, it’s important to note that a shift from trucks to trains is both an opportunity and a threat because the volume of engines needed will be much smaller but any transition will be a long time coming for freight as a vast amount of track upgrading is needed in many countries. Nevertheless, passengers shifting from planes to trains on environmental grounds is happening now plus more passenger trains are changing from diesel to cleaner fuels.

As green hydrogen becomes more available for low-carbon power, Cummins sees applications like the world’s first hydrogen fuel cell passenger trains from French rail manufacturer Alstom. It completed an 18-month trail covering 180,000 kilometres (111,847 miles). The company has partnered with European industrial conglomerate Alstom to supply a fuel cell power system for its Coradia iLint commuter train that’s already operating in Germany.

Others include:

  • Supplying fuel cells for FAUN’s first electric refuse program, powering waste collection vehicles and sweepers in Europe. Each zero-emission truck features 100% electric drive with a range of up to 560 kilometres (348 miles). That is good for multiple collection route runs carrying 10 tons of waste.
  • Working with ASKO, Norway’s largest grocery wholesaler. It is supplying fuel cells integrated into four Scania electric trucks
  • Integrating fuel cells into more than 60 buses in Zhangjiakou, China, which is co-hosting the 2022 winter games.

While we know the widespread adoption of carbon-neutral fuel cell solutions will take time, Cummins is already leaning into the opportunity,” Linebarger said. “As the world transitions to a low-carbon future, Cummins has the financial strength to invest in hydrogen and battery technologies as well as advanced diesel and natural gas power trains.

Ultimately, Cummins will supply hydrogen power trains for heavy-duty trucks, but that market will take longer to develop as further cost reduction is needed to achieve parity with diesel power systems, says Amy Davis, who leads the company’s new power division.

Recent Results

In 2020, CMI stock blew away every analyst projection for the first three quarters at a rate of between 38 and 100%. Fourth quarter revenues of $5.8 billion increased 5 percent from the same quarter in 2019. Sales in North America were flat while international revenues increased 12 percent driven by strong demand in China truck and construction markets as well as the growth in new product sales in India. EBITDA in the fourth quarter was $837 million (14.4 percent of sales), compared to $682 million (12.2 percent of sales) excluding restructuring a year ago.

Revenues for the full year were $19.8 billion, 16 percent lower than 2019. Sales in North America declined 21 percent and international revenues declined 7 percent. Sales declined in all major regions except China, where demand for trucks and construction equipment reached record levels.

We faced many challenges in 2020 driven by the severe global impact of the COVID-19 pandemic. I want to thank all of our employees for their dedication to our company and our customers as they adjusted to the unprecedented slowdown in the global economy and then responded as demand accelerated sharply in the second half of the year, all while facing significant disruption to their daily routines at work and home. Tom Linebarger, Chairman and CEO

Based on the current forecast, Cummins projects full year 2021 revenues to be up 8 to 12 percent, and EBITDA to be in the range of 15.0 and 15.5 percent of sales. Revenues are expected to increase in all regions and major markets except China where they expect demand to moderate after a record year in 2020. The Company plans to return 75 percent of Operating Cash Flow to shareholders in the form of dividends and share repurchases.

Other 2020 Highlights:

  • Cummins increased its cash dividend for the 11th straight year and returned a total of $1.4 billion to shareholders in the form of dividends and share repurchases.
  • In November of 2020, Cummins was named to the S&P Dow Jones Sustainability Indices for North America, one of the premier measures of corporate sustainability, for a 15th consecutive year.

Engine Segment

  • Sales - $2.3 billion, up 2 percent
  • Sales were flat in North America but increased 8 percent in international markets primarily due to increased demand in China and India.

Distribution Segment

  • Sales - $2.0 billion, down 2 percent
  • Increased demand in power generation markets offset by declines in parts and service

Components Segment

  • Sales - $1.8 billion, up 18 percent
  • Revenues in North America increased by 1 percent and international sales increased by 40 percent due to higher demand in China and India.

Power Systems Segment

  • Sales - $989 million, down 6 percent
  • Power generation revenues decreased by 2 percent while industrial revenues decreased 12 percent due to lower demand in mining and oil and gas markets.

New Power Segment

  • Sales - $34 million, up 89 percent
  • Segment EBITDA loss - $51 million
  • Revenues increased due to greater demand in transit and school bus markets in addition to 29 megawatts of electrolyser projects commissioned
  • Costs associated with the development of fuel cells and electrolysers as well as products to support battery electric vehicles are contributing to EBITDA losses.

Recent Newsflow

Amazon recently announced that it is upgrading its truck fleet to add hundreds of vehicles that run on natural gas as it explores new ways to reduce carbon emissions. The tech company ordered over 700 compressed natural gas trucks that would run from warehouses to distribution centres. Amazon is testing new vehicle types including electric, compressed natural gas, among others, and the trucks will be supplied by a joint venture between Cummins Inc and Westport Fuel Systems Inc. Amazon has been exploring avenues to become carbon neutral by 2040 in support of the Climate Pledge commitment, according to its statement in October.

Hydrogen-powered Test Vehicles using Cummins Fuel Cell System

Source: Cummins

Valuation Upside

Cummins is a financial outlier as many hydrogen stocks go because it actually makes money! The PE is just 17x, admittedly partly because this isn’t a pure play for hydrogen fuel cells. But it’s important to note that the valuation can therefore increase as the proportion of the higher valued hydrogen business increases. Moreover, Cummings’ core businesses of diesel, natural gas, electric and hybrid powertrains are producing cash to heavily invest into this growth area, accelerating its entry into hydrogen fuel application with no recourse to shareholders.

My view is that analysts have yet to fully factor hydrogen exposure and growth potential into Cummins valuation. For comparison, other hydrogen-linked stocks such as Plug Power which doesn’t produce bottom-line earnings yet trades at 25 times estimated 2021 sales. Plug is expected to generate about $1.1 billion in sales by 2025. At a similar multiple of sales, Cummins’ hydrogen business would be worth roughly $5 billion. That is about 15% of Cummins market value today. Hydrogen could be even more meaningful to Cummins shares as more deals are announced. Meanwhile the business is firing on all cylinders in the recovery, with North American sales slated to recover strongly while China and India provide newer meaningful sales streams going forward. The other factor is that none of the 11 analysts covering Plug cover Cummins. They all cover a mix of renewable-energy technology. Analysts covering Cummins stock typically cover a range of automotive and truck stocks.

Even if we value Cummins against traditional automotive manufacturers, today’s price looks attractive. Cummins P/E is 17. Other “traditional" manufacturers are higher. John Deere’s is 34 and Caterpillar is 43.


Semiconductor - Chip shortages may slow down truck production and the need for engines.

Recessions - Are not good for truck makers (though we are in a post covid economic recovery phase)

Competition - Mainly internationally, though Cummins remains one of the leading players and innovators

History of setbacks in hydrogen - For decades, hydrogen has been hailed as a potentially revolutionary alternative to fossil fuels - General Motors built its first hydrogen-powered vehicle in the 1960s. Yet its high costs and complexities have stunted previous attempts at creating whole new economies centred around hydrogen. It looks like technology and investment is finally removing the high price and lacking infrastructure obstacles but further delays cannot be ruled out.

Accidents - The deniers also claim it is very dangerous. Fact: it is certainly explosive and must be handled and stored properly but it is not much worse than natural gas. The auto-ignition temperatures of hydrogen and natural gas are very similar. Both have auto-ignition temperatures over 1,000°F, much higher than the auto-ignition temperature of gasoline vapour for example.

High Valuations in Green Stocks - Some stocks within the green energy universe are extremely highly valued, Tesla being one example with a P/E of 995. If that bubble bursts, all clean fuel stocks including Cummins could be dragged down.


Many countries are very focused on implementing policies and investment aimed at improving the environment and we have discussed why hydrogen is likely to be part of the mix. The new Biden administration promises more action to help clean up the environment. At state level, California is leading the way in the US. North of the border, Canada is a world leader in clean fuels. That adds to opportunities for Cummins that are not solely linked to hydrogen but other clean gas truck fuels too.

The demand potential is enormous across a range of applications and Cummins is very likely to be one of the leading players. Cummins is a well-known, world leading engine maker for trucks and trains with more and more fueled by clean natural gas. What is not so well-known is it is now also leading the way into hydrogen-powered heavy vehicle engines. Hydrogen is our future’s fuel. The combination should ensure Cummins stays in the driving seat and takes investors with it.

My bet is that the market slowly comes to realise this hidden asset within Cummins. What is also positive is that the traditional core business is in a material upswing as the economies around the world recover from Covid.

This material is not investment research in accordance with the legal requirements designed to promote investment research independence and is also not subject to any prohibition on dealing ahead of the dissemination of investment research; and as such is considered to be a marketing communication.
All investments have the potential for profit and loss and your capital may be at risk. Past performance is not indicative of future results.

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Written by
Pouneh Bligaard
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