Cummins Inc. (CMI, Financial) is involved in designing, manufacturing, distribution and servicing of diesel and natural gas engines and engine-related component products. The company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. The company has four complementary operating segments: Engine, Distribution, Components and Power Generation. These segments share technology, customers, strategic partners, brand recognition and the company’s distribution network in order to compete more efficiently and effectively in their respective markets.
PACCAR is the company’s largest customer, accounting for approximately 14 percent of its consolidated net sales in 2014. In addition, Cummins have long-term heavy-duty engine supply agreements with Navistar (NAV, Financial), Volvo Trucks North America and Daimler Trucks North America and long-term mid-range supply agreements with Daimler Trucks North America, Navistar, Ford (F, Financial) and MAN. The company also has an agreement with Chrysler to supply engines for its Ram trucks.
The company’s revenues have increased from $13.27 billion in 2010 to $19.22 billion in 2014. In the same period, its EPS has also increased from $5.28 to $9.02. Cummins has passed on benefit of this improved performance to its shareholders by increasing its dividend from $0.875 in 2010 to $2.81 in 2014. Going forward, sell side analysts are expecting the company to post an EPS of $10.00 in 2015 and $11.07 in 2016. The company’s topline is expected to grow 3.10% in the current year and 5.30% next year.
In the near-term the company is expected to benefit from year-over-year growth in North American heavy-duty and medium-duty on-highway markets. The company’s distribution segment revenues will also benefit from acquisition of partially-owned North American distributors. Internationally, the company’s new ISG engine is expected to continue gaining market share in China, while improving demand in Indian markets is also expected to help the company’s performance. Longer term, the company is expected to benefit from secular trends like tightening emissions controls across the world; and increasing infrastructure needs in emerging markets.
Cummins is trading at a forward P/E of 12.82 and has a dividend yield of 2.20%. According to Gurufocus DCF calculator, the company has a business predictability rating of three stars and its stock offers a margin of safety of 34%.
Out of 29 analysts covering the stock, 15 are positive and have buy ratings, 13 have hold ratings, and one has a sell rating. Goldman Sachs' (GS) strategists recently added the stock to their dividend basket. I believe the stock is a good buy at current levels given its attractive valuation, good long term growth prospects and high dividend yield.
