Cummins: A Good Buy On The Dip

Feb. 22, 2015 3:13 AM ETCummins Inc. (CMI)9 Comments
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Summary

  • Due to its extensive global footprint, Cummins is exposed to a number of risks.
  • Its product portfolio, efficient management and strong business model will allow it to do well in the long term.
  • It is likely to post higher profits, even though it faces currency headwinds.
  • It is a good pick at current valuations.

Cummins Inc.'s (NYSE:CMI) strategy of extending the scope of its business with acquisitions, expansion into related markets, investments in the core business, lowering of production costs through economies of scale, and increasing market share through partnerships has allowed it to expand its revenue base and profits over the years. The company has an extensive global footprint both in developing and developed markets, as more than half of its revenue comes from international markets. Cummins works in four different business segments: Engine, Distribution, Components and Power Generation.

However, due to its diversified business model and penetration in more than 180 countries, the company is exposed to a number of risk factors, including the varying conditions in the on-highway, construction and general industrial markets, along with currency, political, economic and regulatory matters. This is the reason we have seen short-term volatility in its stock price over the years, but the long-term outlook always remains strong due to its resilient business model and innovative product lines. We have seen this trend again in the past few months due to concerns related to the strong dollar and slowdown in the power generating business segment.

As a result, the company presented a muted outlook for the next year compared to earlier forecasts. In addition, a number of analysts, including Susquehanna and First Global, downgraded their price targets which impacted Cummins' stock performance in the past two months. I believe investors should overlook these short-term issues because the company is still poised to generate mid-single-digit growth in sales, and currency trends are beyond the company's control and always short term in nature. Hence, nothing is materially wrong with its business model.

Excluding the power generation segment, Cummins' other three business segments are going strong and account for 85% of total revenue. Its largest revenue contributing segment - Engine - is likely to keep its

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