Cummins should see more earnings upside as data center demand for backup power supplies remains strong, according to Morgan Stanley. Analysts led by Angel Castillo named Columbus, Indiana-based Cummins a top pick and reiterated an overweight investment rating. Castillo also raised his price target by $2 to $341, implying 16% upside from Friday's close.
The analyst said data center-related growth was once thought of as immaterial to total sales for companies such as Cummins and Caterpillar . But Castillo said second-quarter earnings showed there is a compounding effect on the bottom line from this demand given benefits from strong pricing, mix and incremental margins, so that the profit impact is greater than the sales number. That should continue to make itself more apparent, he said, as the companies build out this business to meet interest for backup power in data centers.
"Combined with the companies' investments to double capacity in the next 2-3 years, we think this offers more earnings upside than expected by the market over the next several years," he said. Cummins is Morgan Stanley's "preferred way to play this." Castillo lifted his estimate for earnings per share to $20.
05 from $19.92 in 2024 and to $25 in 2025, up from $24.23.
That is about in line with Wall Street's consensus for 2024, but 2025's figure is around 12% higher than other analysts expect. On top of data centers, Morgan Stanley also pointed to an improved view on the North American truck business cycle .