Its engine segment is its bread and butter, accounting for over 50% of sales. The segment produces engines and parts in the on-highway and industrial markets. Its engines are used in trucks of all sizes, buses and recreational vehicles. However, Cummins has managed to underperform the S&P 500 over the past twelve months.
This downturn has been in part due to weak performance. The company showed a 21.9% fall in earnings last quarter on a year over year basis, thanks in large part to lower revenues. For full year 2012, Cummins Inc. (NYSE:CMI) reported a 5.1% decrease in net income per share to $8.61.
However, the company has still managed to beat analysts’ EPS estimates in each of the last four quarters. Analysts are also encouraged by the company’s future prospects, with the company expected to grow EPS at an annualized 9.6% over the next five years.
Cummins Inc. (NYSE:CMI) also has a strong balance sheet; it had cash of $1.4 billion at the end of 2012, compared to long-term debt of $698 million. Cash flow from operations was $1.5 billion in 2012 and CapEx was only $690 million.
Another big encouragement is how excited hedge funds are about the stock. Going into 2013 there were a total of 39 hedge funds long the stock, which was up 30% from the third quarter. This include a variety of notable managers, including Columbus Circle Investors, Adage Capital Management and billionaire Ken Griffin’s Citadel Investment Group.
Navistar International Corp (NYSE:NAV) is a manufacturer of International brand commercial and military trucks. The company has been improving but still has its struggles. It posted a loss of $1.42 per share in the first quarter of fiscal 2013 compared to the $2.06 loss in the prior-year quarter.
Revenues from Navistar International Corp (NYSE:NAV)’s largest segment, trucks, fell some 20% last quarter year over year. As well, its engine segment was down 13.9%. Navistar also only had $500 million in cash at the end of January 2013, with total debt upwards of $4.5 billion.
A big plus for Cummins was Navistar’s abandonment of its decade-long Class 8 diesel truck engine strategy in 2012, which forced the company to turn to Cummins Inc. (NYSE:CMI) for a viable solution. Navistar had been bullish about its exhaust gas recirculation project, which it had invested around $700 million in development costs since 2001. However, the truck engines failed to meet EPA standards, whereas Cummins uses selective-catalytic reduction, so Navistar International Corp (NYSE:NAV) now plans to combine its 13-liter MaxxForce engines with Cummins’ aftertreatment.
This further puts Cummins in the driver’s seat with respect to diesel engine market share, where the company owns nearly 40% of the heavy-duty truck-engine market share. What’s more, Navistar has a joint venture with Caterpillar Inc. (NYSE:CAT) to produce dump trucks and other trucks, with Caterpillar dealers also already selling Navistar-built trucks in overseas markets.
Caterpillar Inc. (NYSE:CAT) has seen of the worst pressure from the economic slowdown:
This despite the fact that its average 15-year beta (1.4) is less than Cummins’ 1.57. However, I think that Caterpillar will be a big benefactor of the bolstering economy. This should in turn be a big positive for Cummins. One of Navistar’s engines sold is in Caterpillar’s CT-660 on/off-road vocational truck, which will be equipped with selective catalytic reduction (SCR) equipment from Cummins. Those engines are also likely to go into Caterpillar Inc. (NYSE:CAT)’s trucks.
Navistar still calls billionaire activist Car Icahn one of its top shareholders. However, Icahn dumped his Oshkosh stake during the fourth quarter of 2012, abandoning the idea to put pressure on the two companies – Navistar and Oshkosh – to merge their defense units.
By the numbers
Cummins Inc. (NYSE:CMI) is relatively cheap compared to major peers and trades near the low end of its five year price to earnings trading range, 4.9 times to 26.4 times.
| Cummins | Brunswick | Generac | Navistar | |
| Forward P/E | 10.5 | 11.5 | 10.4 | 14.0 |
However, Cummins has superior ability to generate higher returns for shareholders:
| Cummins | Brunswick | Generac | |
| Return on investment | 23% | 11.50% | 10.40% |
| Return on assets | 13.3% | 5.8% | 6.0% |
Cummins also has a strong balance sheet:
| Cummins | Brunswick | Generac | Navistar | |
| Debt ratio | 6% | 23% | 56% | 52% |
Don’t be fooled
Cummins Inc. (NYSE:CMI) also offers investors a 1.8% dividend yield, and although the valuation doesn’t make company “super” cheap, the fact that Cummins has an industry leading balance sheet and superior returns (ROI and ROA), I think they should trade at a premium valuation to some of the other engine-related manufacturers.
The article What’s to Come for Cummins? originally appeared on Fool.com and is written by Marshall Hargrave.
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