Cummins Finds Another Gear

By Stephen D. Simpson, CFA | April 28, 2011 AAA

It looks like truck engine maker Cummins (NYSE:CMI) is back to its old ways by posting eye-popping growth and handily surpassing estimates. As the global truck market continues to grow, it looks like Cummins should have plenty of opportunities to continue to grow its already impressive business.

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Better Results Down the Line at Cummins
Cummins seems to be one of the relatively few industrial companies not seeing any real margin pressures in the final results. Sales jumped 56% from last year's first quarter (though declined 7% sequentially), led by 68% growth in the engines business. Growth was strong across the board, though, as power generating was up 54%, components were up 47% and distribution sales rose 35%. (For more, see Truck-Makers Still Hauling In Profits.)

As mentioned, margins were not problematic. Gross margin rose 50 basis points from the year-ago quarter, while operating income doubled and those margins grew more than three full basis points. Also encouraging is that those margins grew sequentially - gross margin rose a full point on that basis, while operating margin grew about 70 basis points. (For more, see The Bottom Line On Margins.)

A Truly Global Company
Plenty of industrial companies position themselves as "global" stories, but relatively few actually get less than half of their revenue from the United States like Cummins. In that regard, Cummins really is an impressive way to play growth in India and China. The company expects to derive nearly $2 billion in revenue from India this year, with double that amount coming from China. While partnerships with major local companies like Tata Motors (NYSE:TTM), Dongfeng and Komatsu (OTCBB:KMTUY), which has a large emerging Asia business, is clearly an important part of that growth, investors shouldn't underestimate what the company has done outside of these joint ventures.

The emerging growth trend will not be without volatility, but it's a legitimate driver. Brazil, China and India are building more roads, businesses are moving more goods - and that is feeding a strong demand for trucks. Data from companies like PACCAR (Nasdaq:PCAR), Navistar (NYSE:NAV) and Daimler Trucks all corroborate this strong market for commercial trucks.

Not the Only Play ... But a Good Play
Clearly Cummins is not the only way to play this secular trend. Large conglomerates like Eaton (NYSE:ETN) and Illinois Tool Works (NYSE:ITW) have a stake, as well as more focused parts companies like Tenneco (NYSE:TEN) and Federal-Mogul (Nasdaq:FDML). Investors wanting more esoteric plays can also look at names like Ingersoll-Rand (NYSE:IR), with its Thermo King business (which provides refrigeration units for trailers); and Wabash National (NYSE:WNC), which makes those truck trailers.

Where Cummins stands out, though, is in its quality - both its products and as a public company. What's more, Cummins is a good play on the off-highway growth being seen by machinery manufacturers like Joy Global (Nasdaq:JOYG) and Terex (NYSE:TEX).

The Bottom Line
Even with the growth kicker from emerging markets, this cycle in commercial trucks is likely to resemble past cycles in one important way - it won't last forever. That said, it could last a while, and Cummins stock could continue to outperform in the meantime. Missing Cummins below $100 in March feels like one of those "shoulda coulda woulda" moments, and investors looking to add a high-quality industrial name should definitely keep an eye on this one if it sells off again soon. (For more, see Cyclical Versus Non-Cyclical Stocks.)

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