Will Cummins Continue to Motor Higher?

With shares of Cummins Inc. (NYSE:CMI) trading at around $105.82, is Cummins an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Cummins designs, manufactures, and distributes diesel and natural gas engines, electric power generation systems, fuel systems, and more. The global economy has been and will continue to be the most important factor for Cummins. If you look at the max stock chart, you will see that Cummins has performed exceptionally well during bull runs and poorly during recessionary times. If the global economy continues to recover, then Cummins has phenomenal potential, which would mostly relate to the sale of new engines. If the global economy doesn’t recover, there will still be demand… and there will still be a decent yield. Cummins has increased its dividend consistently over the past decade despite some challenging environments.

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The following information is from southerngas.org: “For those of you who may have missed it, Cummins-Westport recently announced they have begun development of a natural gas version of the Cummins 6.7 liter ISB engine which will be ideally suited for medium duty trucks, Class C school buses, vocational applications, etc.  The 6.7 liter will join their current lineup of 8.9 and 11.9 liter natural gas engines and the 15 liter engine Cummins announced back in March so there will be a natural gas option for just about any size vehicle in the near future.”

As you can see, Cummins is setting itself up for the future in strategic fashion. Now let’s take a look at some important numbers.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Cummins is excellent. The balance sheet is also impressive. Cummins is stronger than Gardner Denver Inc. (NYSE:GDI) and SPX Corporation (NYSE:SPW) in both areas.

Debt-To-Equity

Cash

Long-Term Debt

CMI

.12

$1.27 Billion

$747.00 Million

GDI

.32

$248.93 Million

$331.76 Million

SPW

.93

$346.30 Million

$2.15 Billion

 

T = Technicals on the Stock Chart Are Strong

Cummins has performed extremely well over the past three years. Even the past year has shown healthy returns. Also keep in mind that Cummins has a higher yield than Gardner Denver Inc. Cummins has a yield of 1.90 percent, SPX Corporation has a yield of 1.50 percent, and Gardner Denver Inc. has a yield of .30 percent.  

1 Month

Year-To-Date

1 Year

3 Year

CMI

9.96%

24.89%

24.71%

141.00%

GDI

-1.26%

-12.26%

-12.92%

58.35%

SPW

-1.40%

10.76%

10.19%

22.80%

 

At $108.07, Cummins is currently trading above all its averages.   

50-Day SMA

98.58

100-Day SMA

97.95

200-Day SMA

101.02

 

E = Earnings and Revenue Have Been Impressive

Earnings and revenue have been improving since 2009.

2007

2008

2009

2010

2011

Revenue ($)in billions

13.05

14.34

10.80

13.23

18.05

Diluted EPS ($)

3.70

3.85

2.16

5.28

9.55

 

When we look at last quarter on a YoY basis, we see a decrease in revenue and earnings. However, Cummins has bounced back strong since then.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

4.63

4.92

4.47

4.45

4.12

Diluted EPS ($)

2.35

2.85

2.38

2.47

1.86

 

T = Trends Might Support the Industry

Cummins has a lot to gain if there is indeed a natural gas boom ahead. There has been a lot of excitement about natural gas for years. When will this excitement turn to reality? Many experts predict it will be soon, but that has been the case for a long time. Up until this point, it has simply come down to the price of oil. When oil peaks, so did natural gas. In these times, natural gas is looked at as a better alternative. In regards to oil, supply has increased and demand has weakened. Therefore, it would be difficult to imagine a scenario where oil spikes in the near future.

Conclusion

Despite what happens with the global economy and natural gas, Cummins will be on solid ground. Barring a fiscal cliff disaster, it’s one of the safer investments you will find. It’s also a company that recently announced a new $1b share buyback program. This isn’t only beneficial for shareholders in the short-term, but it shows that management is confident about future prospects.

Cummins is an OUTPERFORM.

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