Cummins: Kicking the Tires on a Company in Transition

The numbers tell a clear story. Cummins delivered a solid fourth quarter, with revenue ticking up 1% to $8.5 billion. But the full-year picture is a different tale: sales fell 1% to $33.7 billion, a direct hit from a weak truck market. Yet even in that tough environment, the company's core engine kept running. Excluding the charges for its hydrogen retreat, the underlying profitability was record-setting, with Q4 adjusted EBITDA at 16% of sales.

That resilience is the good news. It comes from businesses people still need: data center backup power and distribution networks. The Power Systems and Distribution segments set records, proving the company's ability to pivot and profit where demand is real. The cash flow is strong, with operating cash flow up last quarter.

The bad news is the $218 million charge in the quarter. This isn't just an accounting footnote; it's the final, costly step in walking away from a losing bet. It marks the end of Cummins's commercial push in electrolyzers, a business that lost $438 million last year. The company is paying a steep price to exit a market where green hydrogen demand has significantly cooled. This charge, and the earlier $458 million hit for the year, are the tangible cost of a strategic pivot.

So the setup is clear. Cummins is a cash-generating machine in its core, disciplined businesses. But it's also paying a heavy price to cut its losses on a future it now sees as dimmer. That creates a tension: the underlying health is strong, but the near-term outlook is clouded by the financial and operational cleanup from that hydrogen retreat. The stock's path will depend on whether investors see the core strength as enough to outweigh the cost of this pivot.

Where the Demand Really Is: Power Systems and Distribution

The real story at Cummins isn't in the headlines about truck sales or hydrogen retreats. It's in the numbers from the segments where people are still buying. Kick the tires on the financials, and the signal is clear: demand is shifting, and the company is adapting.

The standout is the Power Systems segment. Revenue there surged 16% to a record $7.5 billion, powered by a need for backup power that isn't going away. This isn't just growth; it's a massive expansion in profitability, with the segment's EBITDA margin hitting 22.7% of sales. That kind of margin is the gold standard, indicating a product people value and are willing to pay for, especially in data centers and critical infrastructure. The company is doubling down, having already completed the doubling of its 95-liter engine capacity for this business.

Then there's the Distribution segment, which also grew strongly. Revenue climbed 9% to $12.4 billion, and its EBITDA margin improved to a solid 14.6%. This shows brand loyalty and a reliable network in action. Customers are still turning to Cummins for engines and components, even as the core truck market sours. The growth here is a testament to a trusted brand and a well-oiled supply chain.

Contrast that with the Engine segment, and the deep problem in the core truck market becomes undeniable. Revenue there fell 7% last year to $10.9 billion. That's a direct hit from weak demand, and it's the primary reason the company's overall sales dipped for the year. The numbers here are a stark reminder of the cyclical downturn Cummins is navigating.

The bottom line is a story of two businesses. One is scaling rapidly, driven by real-world utility and high margins. The other is under pressure, reflecting a tough market. For investors, the key is separating the signal from the noise. The Power Systems and Distribution engines are still running strong, and that's what's keeping the cash flowing while the company sorts out its future.

The Strategic Shift: From Hydrogen to New Engines

The company's retreat from hydrogen is a clear, costly exit. Cummins has stopped future commercial activity in electrolyzers, a business that lost hundreds of millions. This isn't a minor adjustment; it's a full pullback that frees up capital and management focus. The $218 million charge in the quarter is the final payment on that retreat, a necessary cleanup to stop bleeding resources into a market where green hydrogen demand has cooled significantly.

That capital, and the strategic clarity, can now be redirected. The company is putting its energy into new products designed to meet real customer needs. The launch of the X10 and B7.2 engines is a direct response to that need, aiming to capture demand in a market where efficiency and performance are paramount. These aren't just incremental updates; they are bets on future demand in the truck and power generation sectors.

More broadly, Cummins is targeting the power generation market with a new S17 Centum genset engine. This fits perfectly with the booming demand for backup power that powered the record growth in the Power Systems segment. It's a logical extension of a business that's already scaling rapidly, showing the company can pivot its product portfolio to where the demand is strongest.

The bottom line is a company choosing its battles. By walking away from a losing hydrogen bet, Cummins is making room for investment in engines that customers are still buying. The strategy is simple: double down on proven demand in power generation and distribution, and use the freed-up capital to refine the products that will drive that growth. It's a pivot from a future that dimmed to one that's already here.

The Road Ahead: Catalysts, Risks, and What to Watch

Management's forward view is cautiously optimistic. For 2026, the company is forecasting revenue growth of 3% to 8% and EBITDA margins of 17% to 18% of sales. That's a slight improvement from the full-year 2025 adjusted margin of 17.4%, suggesting the core businesses are on a path to regaining their footing. The guidance implies the strong demand in Power Systems and Distribution will continue to lift the overall numbers, even as the Engine segment remains under pressure.

A potential catalyst is on the horizon. The upcoming EPA 2027 engine rule is a regulatory tailwind that could boost demand for cleaner, more efficient engines. Cummins's new X10 and B7.2 engines are squarely aimed at this market. If the rule accelerates the retirement of older trucks, it could provide a meaningful tailwind for the Engine segment, helping to offset the ongoing weakness in North America truck volumes.

Yet, a key risk remains in the fine print. The company has already flagged that tariffs diluted full-year EBITDA margins by about 50 basis points, and that impact is expected to continue in 2026. More importantly, there is uncertainty around U.S. content rules for new engine offsets. These rules could pressure margins if they force changes in sourcing or increase costs for components. It's a regulatory overhang that adds friction to the company's cost management efforts.

The bottom line is a setup with clear drivers and a tangible headwind. The company is guiding to growth, backed by record order books in power generation and a product pipeline for cleaner engines. But the path isn't smooth. The ongoing tariff drag and the looming uncertainty over U.S. content rules are real frictions that could slow the margin expansion the guidance implies. Investors should watch for clarity on those rules and for any signs that the EPA 2027 rule is moving forward, as those will be the next major catalysts or pressures.