Is Cummins Still A Buy?

| About: Cummins Inc. (CMI)

To boost its engine segment, Cummins (CMI) will supply its new V8 turbo diesel engines to Nissan (OTCPK:NSANY). It expects to begin producing these engines next year. Nissan's new 'Titan' trucks will use the V8 engines. With a peak force rating of 500 pounds per foot and 300 horsepower, this new V8 engine is highly fuel efficient. According to a consumer survey by Nissan, there is a strong demand among Titan owners for such a powerful and fuel efficient engine. The new Titan trucks will go on sale in 2015, and Nissan expects to produce around 100,000 units annually. With the expectation of these large numbers of trucks, I believe Cummins is well positioned to grow with its V8 engines.

To further boost its engine segment, Cummins will increase its diesel engines portfolio. In the third quarter of 2013, the company announced that the demand for medium duty trucks increased in North America. In order to meet this rising demand and enhance its diesel engines portfolio, Cummins will begin production of a new 'ISV5.0' diesel engine for North America's medium duty trucks. These engines are also designed for other light vehicles and school buses in North America. The ISV5.0 has a competitive edge with its best 'in industry' features, which allow this engine to have better fuel efficiency and reduced emissions.

The production of this engine is expected to start next year. Revenue from the company's operations in North America increased 11% year over year in the third quarter. With the announcement of this best in industry engine, I expect the growth momentum in revenue from North America will continue in the next year.

Cummins' engine segment, is also betting on its deal with Navistar (NAV). As per this deal, Navistar will include Cummins' engines in its medium duty trucks and school buses. The financial impact of this deal can be read here. In the third quarter of fiscal year 2013, Cummins' engine segment's sales declined 1% year over year to $2.5 billion. Considering the above growth factors to boost the engine segment, I expect the decline in this segment will revert.

Navistar secured highest orders in September 2013 since December 2011 for its medium duty trucks. It considers its deal with Cummins as the primary reason for this growth in orders. The commercial delivery of medium duty trucks and school buses of Navistar, which contain Cummins' engines, will begin in December 2013. Navistar has a huge demand for its vehicles with Cummins engines as many of the company's customers have asked for Cummins engines to be included in Navistar's vehicles. I am optimistic about Navistar with respect to this deal and its turnaround strategy.

Dividend growth

Cummins announced on October 15, 2013 to pay dividend of $0.625 per share, which is a year over year growth of 26%. This dividend is expected to be paid on December 2, 2013. At a stock price of $130, the dividend yield of Cummins is 1.91%. Its past five years historical range of dividend yield is 0.77%-3.52%, with an average dividend yield of 1.48%. Cummins' current dividend yield supports its stock, and this current dividend yield is higher than the average dividend yield of past five years.

Along with its growth fundamentals, the stock valuation of Cummins supports its growth prospects. The trailing twelve months PE ratio of Cummins is 17.33 and its forward PE is 14.03. Its price to book, or PB, ratio is lower than the industry's PB ratio of 24.1. The price to sales, or PS, ratio of Cummins is 1.43, lower than the industry's PS ratio of 11.72. Cummins' ROE is 21%, significantly higher than the industry's ROE of 15.7%.


I think Cummins will grow its engine business due to three factors. Firstly, its deal with Nissan, under which it will supply its diesel engines for Nissan's new Titan trucks. Secondly, Cummins expanded its revenue generation opportunities from North America by launching a new diesel engine, owing to the increasing demands for trucks in the region. Thirdly, Cummins is growing its engine segment by supplying its engines for Navistar's medium duty trucks and school buses. Keeping above points in mind, investors can rely on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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