Cummins (NYSE:CMI) which started as a diesel engine manufacturing company now designs, manufactures and markets diesel and natural gas engines, electric power generation systems and engine-related component products. The company has doubled its net income in the past 4 years. The company's cash is also increasing quite swiftly which is another good factor to watch, for investors looking to invest in it for the longer term.
Cummins (CMI) has improved financially over the past few years. The net income of the company rose from $755 million in 2008 to $1.65 billion in 2012. The company has given excellent returns to its shareholders as EPS increased from $3.87 a share to $8.69 a share in these past 4 years. One of the reasons behind this increase is the improvement in its revenues which have increased significantly. Another good thing for the company is that the costs and expenses have been stable. The primary cost of the company is the raw material which accounts for more than 70% of the revenues earned. The salary expenses form a small part of the cost.
The company has been heavily investing in R&D which has helped the company to reduce its cost substantially without decreasing the quality of the product. R&D expenses have nearly doubled from $422 million in 2008 to $725 million in 2012. The low amount of debt on the company resulted in a small interest expense of $47 million in 2012 with an interest coverage ratio of more than 30. The company has to pay a large amount of taxes in foreign nations.
In the past few years, Cummins' cash has increased rapidly. The cash reserves now stand at $1.63 billion which were a meager $504 million, in 2008. The accounts receivable have increased at an annual rate of 8.5% and the company has been able to get rid of bad debts or doubtful accounts from its balance sheet. The current assets form more than half of the size of the balance sheet. The accounts payable have increased at an annual rate of 7.5% since 2008 and have matched the pace of accounts receivable. Hence, there hasn't been a huge increase in working capital requirements due to this very reason. The company has been able to run its operations smoothly without increasing its debt.
The company has consistent cash flows from operations with some variations due to the fall in demand in 2012. In that period, the cash flows from operations were at a low of $1.01 billion. This year saw a significant rise in working capital as receivables decreased. But the company has held onto its market share and is trying to expand in order to enhance the revenue streams it currently has. Regular investments have been made in terms of fixed assets to increase the scale of operations. The company also makes use of its cash to invest in short term investments. It has used its profits to fund these investments and also fund its financing activities through which it has been repurchasing its shares on a regular basis. This has led to an enormous increase in the treasury stock and that stands at $1.83 billion. This is another important reason for the huge rise in EPS over the last 5 years. The company is also exposed to foreign exchange rate changes which have led to erratic cash flows. The year 2011 saw an outflow of $35 million whereas 2012 saw an inflow of $25 million.
In the last 5 years, Cummins has significantly increased its profitability. A major source of concern is the slow rise in its revenues. It operates in a cyclical industry and is exposed to significant market risk, but the expansion in operations has helped it to diversify. Expanding to developing economies and exploring new customers for its products will be the mantra in the near future, for the company. The excellent R&D division has enabled the company to increase its product portfolio. The profits were a little subdued in the previous quarter for the company and that has caused the stock to dip. This is a good time to buy as the company is in good financial health with a lot of cash and has been investing this cash to get returns in the near and long term. The dip in this stock, after posting lower profits for the quarter ended March, is an excellent opportunity for investors to buy. The stock is a good investment option for the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.