Cummins (CMI) had been firing on all cylinders - bad pun, but perfectly descriptive - until their recent stumble. In early July the company confirmed fears of a significant slowdown in all of their key global markets. Lack of demand in Brazil, China and India were the main culprits in the company's reduced 2012 guidance. We still remain bullish on the company's longerterm growth prospects. At Wedgewood we usually avoid "cyclical" companies, but from time-to-time, superior business models emerge in the cyclical space, particularly if such companies deploy technological advancements as a differentiator to their relative competitive advantage. Cummins is one-of-a-kind on this score. Cummins finished 2011 in truly record fashion. For the full year 2011, revenues grew 36% - a terrific performance given the tough global economic turbulence. 2011 was a record in revenues, profitability and operating cash flow. Cash from operations ($2 billion) was double their previous record. Furthermore, revenues are up 67% over the past two fiscal years – and profits have tripled. In fact, the current revenue run-rate is +26% over the company's pre-recession peak. The dividend has been increased 125% over the past two years. The company's long renaissance is a great American corporate story – rivaling that of the renaissance of Harley Davidson. Both Standard & Poor's and Fitch upgraded the company to a rating of A. Cummins lost their Arating back in 1978. Cummins is uniquely diversified across four divisions (engines, parts and components, distribution and power generation). Cummins is also uniquely diversified across global markets. Indeed, some of their relationships (in India for example) date back over 40 years. The global nature on government-mandated increases in fuel economy for truck engines will drive demand for the company's best-in-class engines, parts and components for years to come. By 2015, the emissions standards will have largely converged. Over the next few years the National Standard 4 in China will drive a significant wave of emissions-related demand for the company's compliant engines and parts. The opportunity in China could be two-to-three times the opportunity relative to the Euro 6 and Euro 5 emission standards.
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