Breaking News
LAST CHANCE for Cyber Monday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

This Stock Has Gained Almost 20% A Year in This Economy

By StreetAuthority Stock MarketsMay 31, 2012 03:35AM ET
www.investing.com/analysis/this-stock-has-gained-almost-20-a-year-in-this-economy-124992
This Stock Has Gained Almost 20% A Year in This Economy
By StreetAuthority   |  May 31, 2012 03:35AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

If I told you about a stock that's delivered gains of nearly 20% to investors for the past five years, then I imagine you'd be a little skeptical. After all, the past five years have been some of the most tumultuous years in recent memory. And even if it weren't, 20% a year is a pretty tough benchmark to meet.
 
Warren Buffett, Carl Icahn, Bill Ackman -- these guys would all kill to even come close to that, not to mention probably take on a lot of risk in the process.
 
They wouldn't have to, though, if they had just invested in one of the world's largest engine manufacturers. And best of all, as a technological leader in fuel efficiency and natural gas engines, it's poised to keep up the pace.
 
I'm talking about Cummins Inc. (NYSE: CMI)
 
With annual revenue of about $18 billion, the company makes diesel engines for construction vehicles, cars, buses and trucks. It also makes natural-gas engines, engine components and electric power-generation systems.
 
Shares of Cummins have climbed 124% during the past five years -- good for an annualized rate of return of 17.5%. Tack on the annual dividend yield, which has averaged 1.3% during the past five years, and you get a total return of 18.8%.

CMI CHART
CMI CHART

That's nothing short of amazing, particularly when you consider the five-year period I mentioned included the financial meltdown, the deep recession of 2007-2009 and the sluggish recovery we're currently experiencing. 
 
To understand how the stock managed to accomplish this -- and why I think it's a candidate to keep outperforming for at least the next few years, we have to look back 10 years ago…
 
Cummins thrived during bad times for several reasons, starting with a smart move made 10 years ago when the company decided to restructure diesel engine-making operations, since they accounted for the bulk of revenue just like they do today (currently 52% compared with 18% for engine components, 16% for power-generation systems and 14% for sales/service). Initiatives included workforce reductions, re-allocation of older manufacturing equipment rather than disposing of it and canceling unnecessary information technology programs. The result was a 13% reduction in the break-even point for diesel engines, meaning Cummins now only has to sell around 260,000 units a year to break even, compared with 300,000 before the restructure. These restructuring initiatives have saved about $97 million a year in operating costs, analysts estimate.
 
Besides becoming leaner, Cummins was fortunate not to have much exposure to Europe and its severe economic problems of the past four or five years. Because management saw better opportunities elsewhere, the company has been focusing less and less on the region: European sales provided 18% of total revenue in 2007, compared with only 9% currently. Half of revenue now comes from economically healthier emerging markets like Asia and Latin America, where Cummins has become a major player through partnerships with the largest truck and truck-component makers in those areas. 
 
In October 2011, for instance, it announced a joint venture with the LiuGong Machinery Co. to produce the Cummins diesel engine for pickup trucks at a new plant in the Guangxi Province of southern China. The plant is scheduled to open in 2013 with an initial production volume of 50,000 units a year. Earlier this year, Cummins announced a joint venture with Latin American distributor Grupo Laeisz to sell and service Cummins diesel engines and power generators in Costa Rica and El Salvador. Grupo Laeisz has already been distributing Cummins products in Honduras for about 40 years.
 
Prospects are also strong in North America, which generates 41% of total revenue. This is particularly good news because business in China, Latin America and some other emerging markets are expected to slow somewhat in the coming years. 
 
Cummins' financial results are already reflecting these trends. In the first quarter of 2012, for example, sales rose 16% to $4.5 billion, compared with $3.9 billion in the same period last year. The improvement was due in large part to soaring demand for heavy-duty commercial truck engines in North America, where sales of these engines rose to $892 million -- a whopping 84% jump from the $485 million generated in the first quarter of 2011. Overall, North American sales climbed 40% to $1.9 billion, compared with $1.4 billion in the first quarter of 2011.
 
In addition to favorable geographic diversification, Cummins also has the advantage of being the largest manufacturer of natural gas and hybrid bus engines in the United States, which could lead to major revenue growth if the United States further increases its commitment to cleaner energy sources. [See: "This Company Could Kill the Gasoline Engine…"] For instance, only about 12,000 public transit buses -- 17% of the country's 70,000 buses -- run on natural gas, leaving plenty of room for further expansion. A similar situation exists with school buses, of which there are roughly 700,000 just in the United States.
 
Risks to consider: Cummins is subject to stringent oversight by the Environmental Protection Agency and other agencies capable of imposing new environmental regulations that increase costs to point of hurting profits.
 
I think Cummins is a good bet to keep growing quickly because of its wise decision to largely avoid Europe and focus on economically sounder emerging and North American markets. I also like the stock because consumers rely heavily on the types of products it makes to function on a daily basis. Still, analyst projections for earnings per share (EPS) to climb 18% annually for the next three to five years seem overly optimistic in today's economic environment, especially for a cyclical stock like Cummins. I'd be much more comfortable projecting half that, or 9% EPS growth.

BY Tim Begany

This Stock Has Gained Almost 20% A Year in This Economy
 

Related Articles

This Stock Has Gained Almost 20% A Year in This Economy

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email