Engine Maker With a Head of Steam
Cummins is a tech company masquerading as a heavy-equipment manufacturer.
Based on most analysts' opinions, the shares of engine-maker Cummins are running on fumes. Both the company and the shares have had a remarkable run, they'll concede, but the stock is now awfully expensive. It's up 14-fold since March 2003, and the price-earnings ratio is three times its historical level. On the other hand, Cummins is growing like kudzu, and most analysts have underestimated its technological prowess. Even at $140 a share, Cummins is worth a look.
One of the few bullish analysts is former Cummins employee Charlie Rentschler, of Wall Street Access. To start with, Rentschler says, "No other American company has done such an incredible job of sticking its roots down into China and India." When most other U.S. companies were sticking up their noses at joint ventures, Cummins was busy finding partners in both countries. It was in India in the 1960s and in China in the 1970s. Two of the three new engine plants Cummins is building are in China. Many Beijing buses, part of the biggest bus fleet in the world, run with Cummins engines.
Such engines are Cummins's bread and butter. The company makes diesel and natural-gas-powered engines for trucks, buses and RVs. But the company also has an important and growing business making generators for factories, offices, hospitals and the like. Generator sales are growing particularly briskly in countries where the electric grid crashes regularly.
Cummins's biggest advantage, says Rentschler, is superior technology. The Columbus, Ind., company is in the vanguard of developing car and truck diesel engines that must meet increasingly tight pollution controls. And passenger cars with diesel engines -- already popular in Europe -- could be a key to lessening U.S. dependence on foreign oil, says Rentschler. In 2009, Chrysler will introduce a light pickup truck with a Cummins diesel engine, he says.
What could go wrong? Well, a lot of big, well-managed companies, such as Caterpillar and Deere, make engines. And most of CumminsUs sales go to companies, such as big-truck makers, that also produce their own engines. Morningstar analyst Ben Butwin sums up the strategic case against Cummins: "The company's recent results are impressive, but we don't see any sustainable competitive advantages."
That's a good point. Cummins's clean-diesel technologies won't be on the leading edge forever. But Cummins keeps coming up with new technologies and new markets, so it can hone new edges.
Analysts see a 19% earnings gain, to $9.13 per share, in 2008. Rentschler thinks Cummins can earn $14 to $15 a share by 2011. That could mean a near-doubling of profits from 2007 levels. So although the stock (symbol CMI) is not likely to produce a 14-bagger over the next few years, earnings growth should keep the shares chugging along nicely for the foreseeable future.