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We believe that Cummins (NYSE:CMI) is a good value at today's price. In recent quarters, Cummins has had some issues with declining profits/revenues but we believe this short-term problem has created a good value for long-term investors. Although truck engine sales have been weak as of late, we see some positive trends that may bode well for Cummins. These trends are the growing need for low emission diesel engines to meet new emissions standards in many parts of the world and the growing need for reliable electrical power in many parts of the developing world.

The first trend that we find interesting is that many governments around the world are implementing new emissions standards for diesel engines. As these new laws go into effect, Cummins should see improving sales of its high-tech low emission diesel engines. We believe that Cummins is better positioned than its competitors to meet these stringent new emissions standards. Moreover, we believe that Cummins will have an economic moat for several years as competitors play catch-up to Cummins's technological advantage. In our opinion, Cummins will have good pricing power (high margins) for its clean emissions diesel engines for many years due to this advantage.

Another positive trend that we see is that in many parts of the developing world the electrical grid is experiencing growing power demand while the power generating and distribution systems cannot handle the increasing load. Many of these electrical power generation and distribution systems are lacking adequate generation capacity as well as needed repairs and maintenance. These issues make the power grids in much of the developing world unreliable. However, these developing world electrical power grid reliability issues are an opportunity for Cummins. Cummins benefits from this problem because it manufactures a full line of power generation systems that are designed to address these customers' specific needs. Many customers use Cummins power generation systems as back-up power for essential operations. While others may use Cummins power generation systems as the primary power source, in remote locations, or as an auxiliary power source for use during times of peak electricity demand. As the economies of the developing world grow so should Cummins's power generation business.

To conclude, we believe that Cummins's business will improve in the relatively near future as pent-up demand for diesel truck engines is alleviated. What we believe is happening to Cummins's business is that many customers have been nervous about the economy and have delayed purchases of new trucks. These purchases cannot be delayed indefinably because, at some point, it becomes more economical to buy a new truck than to maintain an old one. With the catalysts of pent-up demand for diesel trucks and the positive trends regarding new emissions standards and developing world power generation, we believe that Cummins's shareholders will prosper in coming years.

In terms of valuation, we believe that Cummins is a good value at $111.20/share for the following reasons:

  1. Cummins has a relatively inexpensive forward earnings multiple of 12.7 times 2013 earnings.
  2. Cummins has a very solid balance sheet with $1.62 billion in cash and $775 million in debt relative to a $2.29 billion EBITDA.
  3. Cummins has an attractive dividend yield of 1.80% and a history of consistent dividend increases with a 25.0% dividend increase last year.
  4. The median 12-month price target for Cummins is $135.00/share.
  5. S&P has a Strong Buy rating on the stock (5 out of 5 Stars) and a 12-month price target of $150.00/share.

Disclaimer: We are not investment advisors. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Source: We Believe That Cummins Has Good Long-Term Prospects