I am always on the look out for cheap and under valued stocks, and a company that recently attracted my attention was global engine manufacturer Cummins Inc. (NYSE:CMI)
Here is a quick comparison of Cummins Inc. (NYSE:CMI) against its closest competitors:
| Company | Trailing P/E | Forward P/E | EPS growth past 5 years | Sales growth past 5 years |
|---|---|---|---|---|
| Honeywell International Inc.(NYSE:HON) | 20 | 14 | 3.2% | 1.7% |
| Illinois Tool Works Inc. (NYSE:ITW) | 12.7 | 14.5 | 9.9% | 2.2% |
| Cummins Inc. (NYSE:CMI) | 14.8 | 11.8 | 18.6% | 5.9% |
| Sector Average | 21.9 | 12.6 | 0.14% | 2.5% |
The sector average figure is the average of the ratio’s of the ten largest diversified machinery companies in the world.
Cummins Inc. (NYSE:CMI) is the smallest company out of its three competitors. Currently, with a market cap of just under $22 billion, Cummins is around a third the size of Honeywell International Inc.(NYSE:HON), which has a market cap of $61 billion.
Illinois has a valuation of $31 billion currently. Despite its relatively small size, Cummins Inc. (NYSE:CMI) is dominant in the market for engine components.
The recent weakness in Cummins’ earnings and the reason for its recent sell-off appears to be that the company’s customers were putting off orders due to the uncertainty surrounding regulation on emissions standards. However, Cummins is well placed for any change in emission standards as the company already has a wide portfolio of high-tech, low emission engines.
Moreover, out of its closest peers, Cummins appears to be growing the fastest, expanding EPS nearly 19% during the past five years, despite the economic slowdown. Cummins’ peers, Honeywell International Inc.(NYSE:HON) and Illinois, have only managed to grow EPS 3% and 10%, respectively.
Geographical split
Diversified machinery companies are, by their very nature, extremely exposed to the fragile nature of the economic climate. So, with the U.S. economy powering ahead, China slowing, and Europe sinking, it would be helpful to know where each one of these companies generate the majority of their revenue from and how susceptible each company will be to the economic climate in its biggest market.
Illinois Tool Works Inc. (NYSE:ITW)
| Region | Revenue (in $ Million) | Percentage of Total |
|---|---|---|
| Asia/Far East | 2,097 | 11.70% |
| Australasia | 864 | 4.82% |
| Europe | 5,090 | 28.40% |
| North America | 1,222 | 6.82% |
| Rest of the World | 937 | 5.23% |
| United States | 7,714 | 43.04% |
| Total | 17,924 | 100.00% |
Illinois Tool Works Inc. (NYSE:ITW) makes most of its revenue from the U.S., which puts the company in prime position to benefit from the recovery that is gaining speed. However, more than a quarter of the firm’s revenue comes from Europe and this will probably be a drag on revenue growth. Although, 12% of Illinois’ revenue comes from the fast growing Far East, and this could offset some declines from Europe.
| Profit Margin | |
|---|---|
| Gross | 38% |
| Net | 16% |
Illinois Tool Works Inc. (NYSE:ITW) generates a solid net profit margin of 16%, the widest margin out of the three peers in this piece.
Cummins Inc. (NYSE:CMI)
| Region | Revenue (in $ Million) | Percentage of Total |
|---|---|---|
| United States | 8,107 | 46.77% |
| Rest of the World | 4,622 | 26.66% |
| China | 1,056 | 6.09% |
| Brazil | 798 | 4.60% |
| India | 757 | 4.37% |
| Other | 1,994 | 11.50% |
| Total | 17,334 | 100.00% |
Just under half of Cummins’ revenue is from the U.S. Meanwhile, 15% of revenue comes from the fast growing Chinese, Brazilian, and Indian markets, which really offers potential for growth.
| Profit Margin | |
|---|---|
| Gross | 28% |
| Net | 10% |
The company’s net margin is only 10%, less than Illinois Tool Works Inc. (NYSE:ITW)’ above but still a solid net profit margin for a manufacturing company.
Honeywell International Inc.(NYSE:HON)
| Region | Revenue (in $ Million) | Percentage of Total |
|---|---|---|
| Europe | 9,118 | 24.21% |
| Rest of the World | 6,168 | 16.38% |
| United States | 22,379 | 59.42% |
| Total | 37,665 | 100.00% |
Honeywell International Inc.(NYSE:HON) has the largest exposure to the U.S. market out the three companies in this article. Nearly 60% of Honeywell’s revenue comes from the growing U.S. market and this could offer investors a good play on the recovery. That said, one quarter of Honeywell’s revenue does come from Europe and 16% from the rest of the world — the company does not provide a detailed revenue breakdown.
| Profit Margin | |
|---|---|
| Gross | 33% |
| Net | 8% |
Honeywell has the lowest net margin in the group, indicating that the company is the most inefficient of the lot even though it has the largest exposure to the U.S. market.
Conclusion
So overall, Cummins is on offer right now, despite being sold off recently over worries about changes to emission standards, the company is well placed to take a change in regulation in its stride.
Cummins’ product portfolio and strong historic growth indicates that the company will remain resilient in tough times.
That said, there are also reasons to invest in both Illinois and Honeywell. For example, Illinois is highly cash generative and is buying back stock to improve earnings. Additionally, Illinois has a strong history of uninterrupted dividend payments.
Honeywell could be thought of as the weakest company in this set, with small margins and a high valuation. However, the company does generate the majority of its revenue from the U.S., so it could be a good play on the recovering market.
The article A Quick Look at the Diversified Machinery Sector originally appeared on Fool.com and is written by Rupert Hargreaves.
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