Cummins Inc.: Hauling In Profits From Truckers

May.24.11 | About: Cummins Inc. (CMI)

The world is set to pass 7 billion people later this year and meeting the needs of the global population is an ever-growing supply chain, much of which is powered by Cummins Inc (NYSE:CMI) engines.

The bus and truck markets suffered significantly during the recession and are rebounding strongly as the domestic economy strengthens and emerging markets grow.

Ward's Automotive Group estimates April's North American medium and heavy-duty truck production was 60.1% higher year-over-year; bringing year-to-date production to 50.3% above 2010.

At Daimler's (OTCPK:DDAIF) Freightliner, a key Cummins customer and the largest truck maker, sales were up 21.2% in April from last year. Paccar's (NASDAQ:PCAR) Peterbilt and Kenworth trucks, also Cummins customers, saw sales rise 62% and 112.1% last month from 2010. And, over at Volvo (OTCPK:VOLVY), a Cummins customer and the 2nd largest global truck maker, there was a 40% increase in truck orders in Q1.

In North America, Cummins sequential shipments to heavy-duty truck makers rose 15% quarter-over-quarter while shipments to medium duty truck makers were up 14%. The higher shipments resulted in a 70% jump in the company's U.S. sales, which make up 39% of revenue.

April's 38,100 orders pushed North American industry class 8 truck backorders to a 55-month high of 126,000 units, according to ACT research.

Robust truck sales are a driving force behind Cummins guidance for a 30% increase in sales this year from 2010 - impressive considering the company did $14.5 billion in trailing 12-month sales. Even more remarkable, the 30% forecast is upwardly revised from its previous 20% forecast.

A lot of Cummins success is tied to emerging markets including China, where sales rose 66% year over year in Q1. India and Brazil sales were up 31% and 39%, respectively too. The company sees a big future in Africa too where it is currently boosting investment.

Recessionary cost cuts and higher volumes leveraged across them pushed margins up to 24.8%, a 10 year high. Cummins market share remains solid too, with the company estimating a 60% share in medium and 40% share in heavy duty orders from the top 200 truck fleet customers.

But it's not just Cummins truck engines boosting sales and profits. Cummins power generation business, which provides back-up emergency power to industrials, saw sales rise 54% to $795 million last quarter. As brownouts continue across China and Japan we expect additional demand to offer upside.

Given all this cash coming into Cummins, it's not unreasonable to think we'll see dividend and buyback growth. Last quarter the company boosted its share repurchase authorization by $1 billion while buying back $190 million in shares.

If we take the stocks current 13 multiple on 2011 estimates and extrapolate this to 2012, we get a $125 target - 20% higher than today's close. With Cummins beating analyst forecasts in three of the past four quarters, its also not far-fetched to assume we'll see more upgrades. In the past 30 days, analysts have taken their 2012 EPS estimate up 10% to $9.55 from $8.71, giving investors good reason to climb on board this stock for upside into next year.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CMI over the next 72 hours.