In my previous articles, I wrote about several stocks, including Mosaic Co (NYSE:MOS), Johnson Controls, Inc. (NYSE:JCI), SYSCO Corporation (NYSE:SYY) and Parker-Hannifin Corporation (NYSE:PH), that possess characteristics similar to those that had been purchased by legendary investor Warren Buffett. These stocks were the screening results of Thompson Reuters’ StarMine model. In this article, I will cover one more stock that could become one of Warren Buffett’s favorites: Cummins Inc. (NYSE:CMI).
Business snapshot
Cummins, founded in 1919, is the global leading manufacturer and distributor of diesel and natural gas engines and engine-related component products to original equipment manufacturers (OEMs), distributors, and other customers in more than 190 countries. The business operates with four main business segments: Engine, Components, Power Generation and Distribution. The majority of its sales, $10.73 billion, or 62% of total 2012 sales, was generated from the Engine segment. The Components segment ranked second, with $4 billion in revenue, or 23% of the total sales, while the Power Generation segment and the Distribution segment contributed $3.27 billion and $3.28 billion in revenue, respectively. The Engine segment also generates the largest operating income of $1.25 billion in 2012, while the Components segment contributed $426 million in operating income.
A consistently growing company
In the past ten years, Cummins Inc. (NYSE:CMI) has experienced significant growth in both revenue and profits. Revenue has increased from $6.3 billion in 2003 to $17.3 billion in 2012, while EPS has risen from $0.32 to $8.67 in the same period. In addition, Cummins has generated an increasing operating cash flow, from $158 million in 2003 to $1.53 billion in 2012. Income investors might like Cummins a lot as it is quite a consistent dividend-paying company. Since 2003, its dividend has been raised from $0.30 per share to $1.80 per share. Interestingly, Cummins Inc. (NYSE:CMI) is becoming more conservative when it comes to dividend payments. Its 2012 payout ratio stayed at only 20.8%.
Conservatively leveraged
What interests me is the fact that Cummins does not employ a lot of leverage in its operations. As of December 2012, it had $6.6 billion in total stockholders’ equity, $1.6 billion in cash, and only nearly $770 million in both long and short-term debt. The three main big items in its liabilities were its account payable ($1.34 billion), accrued liabilities ($1.3 billion) and deferred revenue ($1.3 billion). Cummins has also been repurchasing its shares: since 2008, Cummins Inc. (NYSE:CMI) has spent nearly $1.2 billion to buy back its shares.
Reasonably priced
At $117 per share, Cummins is worth at around $22.2 billion on the market. It is valued at around 9.3 times EV/EBITDA and 1.28 times sales. Compared to its peers, including Caterpillar Inc. (NYSE:CAT) and Navistar International Corp (NYSE:NAV), I think Cummins Inc. (NYSE:CMI) is quite reasonably priced. Caterpillar is the biggest company among the three, with around $58.2 billion in total market capitalization. At around $89 per share, Caterpillar is valued a bit cheaper at 8.3 times EV/EBITDA and 0.9 times sales. Navistar is the smallest company, with nearly $3 billion in total market cap. It is trading at $37 per share. Navistar generated negative EBITDA, and thus its EV/EBITDA valuation is not valid. Navistar seems to be the cheapest company at only 0.24 times sales.
In terms of profitability, Navistar is generating losses. Caterpillar is the most profitable company with a 13.2% operating margin, while the operating margin of Cummins is around 11.2%. Among the three, Caterpillar pays investors a dividend yield of 2.3%. Cummins’ dividend yield is a bit lower at 1.8%, whereas Navistar does not pay any dividends to shareholders.
The Foolish bottom line
Cummins Inc. (NYSE:CMI) seems to be a good stock to hold in a long run for value investors. However, I would prefer Caterpillar due to its higher dividend yield, lower valuation and better profitability.
The article This Company Could Become One of Buffett’s Favorites (Part 7) originally appeared on Fool.com and is written by Anh HOANG.
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