Bill Nygren Comments on Cummins Inc.
Cummins is the world’s second-largest manufacturer of engines and the largest maker of truck engines. While North America is still its largest market, Cummins has been very successful in building sales and market share in faster-growth emerging markets, which now account for about a quarter of companywide sales. Further, we believe that its undisputed position as the industry leader in emissions controls technology should provide a long-lasting tailwind as countries mandate progressively tighter emissions standards in upcoming years. Cummins earned just over $9 per share last year, so it wasn’t surprising to see the stock reach a price of $130 in March. By July, however, as investors became increasingly concerned about the possibility of decreasing global growth, the stock hit a low of $82. We believe the decline was an overreaction. Cummins now sells at about 9x expected current-year earnings. Like many of our holdings, we expect Cummins to achieve mid-single-digit revenue growth over the economic cycle, and expect per-share growth to be higher as excess cash flow is devoted to share repurchase. Our expectation for above-average EPS growth, a moderate but growing dividend and a higher P/E multiple results in us believing Cummins is likely to produce above-average returns.
From Oakmark Funds' third-quarter letter to shareholders.