Cummins: Safety, Solidity, Growth In Hard Assets

| About: Cummins Inc. (CMI)


Cummins makes diesel and natural gas engines for trucks, buses, and heavy equipment for industrial uses.

This stock provides upside exposure to commodity booms, with less painful losses in commodity busts and downturns.

Cummins stock has amazingly outperformed even Amazon by 30% from 1999 to 2016.

The company has also built substantial industrial operations in India since 1962, offering positive exposure to India's growth story.

Cummins offers an appealing combination of safety, solidity, growth, hard assets, and leverage to the commodity sector on a very long time frame.

You've probably heard the story that the people who really got rich off the California Gold Rush weren't the gold diggers, they were the people who set up businesses in the area to sell supplies and services to the gold diggers.

Kevin O'Leary ("Mr. Wonderful") of Shark Tank has made the same point: Rather than invest in mining companies, he prefers the companies that supply equipment and materials to the miners.

Now I myself will invest in the right miners at the right times -- such as select high quality gold miners right now. But I recognize the long-term value of the suppliers of equipment and materials. They stand to benefit from commodity booms along with the miners, but they lose much less in commodity cycle downturns.

A case in point is Cummins Inc. (NYSE:CMI). This is not a "sexy" company or stock. Cummins is based in Columbus, Indiana, population 44,000, they've been around since 1919, and they make diesel and natural gas engines for trucks, buses, and heavy equipment for industrial uses. They now have operations in 197 countries and territories, and their market capitalization is over $21 billion.

But over the course of the last two commodity boom and bust cycles, from 1999 to 2016, Cummins stock has performed more like a high-flying tech growth stock than a plodding industrial giant. Check out the following chart of two stocks from January 1999 to October 2016:

Click to enlarge

The red line is Amazon (NASDAQ:AMZN) -- and the blue line is Cummins! Yes, during an entire long period of multiple booms and busts, and during precisely a period in which Amazon has risen to market dominance as one of the stock market's great new-economy online tech success stories -- Cummins has still beaten it in stock performance by 30%! And unlike Amazon, Cummins pays a 3.26% dividend, and has a Forward P/E of 15.79 and a P/E of 17.17.

The fundamental point is this: Cummins is a clear winner during commodity booms. The gains are not as huge as more highly leveraged miners and commodity producers, but the gains are very nice nonetheless, as the chart clearly shows. And during the commodity cycle busts and downturns, yes Cummins suffers losses -- but unlike the miners, the losses are relatively small in comparison with the gains of the preceding upturn.

It is a very good idea to invest in "hard assets" for the long term: Real assets that will hold their value no matter what happens to the value of currencies during inflationary periods or financial crises. Cummins stock is an example of a solid investment in such hard assets that does not expose you to too much risk.

Cummins' investment in India

Another very promising aspect of Cummins' business plans and operations is their long-term investment in India's industrial growth. Cummins began their operations in India as long ago as 1962. Their India operations have revenues of $2 billion, 200 locations, and close to 9,700 employees.

You may be familiar with the long-term investment thesis for India: Unlike the developed world and even China, India has much more room for economic and industrial growth over the course of the next generation. Unlike the developed world and China, India has favorable demographic trends, with its young and working-age populations growing faster than its aging and elderly populations.

This is yet another reason to be positive about Cummins' long-term growth prospects, looking out as far as the next 20 to 30 years.


In the short term, right now may not be the ideal entry point to buy Cummins stock, because its share price has just gained as much as 64% in the broad commodity stock recovery from January to October. There may well be a commodity or stock market pullback in the months ahead that provides a much better entry point. But whether you buy it now or later, Cummins stock offers an appealing combination of safety, solidity, growth, hard assets, and leverage to the commodity sector. I like that combination very much on a very long time frame.

Disclosure: I/we 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.

Additional disclosure: I may initiate a long position in CMI on a pullback in the next 3-6 months.