Why I chose CMI ?

About Cummins-

Cummins is an engine manufacturer and was founded in 1919. Cummins has four segments: Engine, Power Generation, Components and Distribution. The Company designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust after treatment, fuel systems, fuel systems, controls systems, air handling systems and electric power. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,500 dealer locations in more than 160 countries and territories.  

Historical data – 

Year	Rev/share	Earnings/share	Div/share	Earnings growth
2013	$95.50	$8.10	$2.25	-6.79%
2012	$91.33	$8.69	$1.80	-4.19%
2011	$93.56	$9.07	$1.33	75.44%
2010	$66.87	$5.17	$0.88	109.31%
2009	$53.64	$2.47	$0.70	-39.46%
2008	$71.23	$4.08	$0.60	10.27%
2007	$65.53	$3.70	$0.43	8.50%
2006	$54.52	$3.41	$0.33	24.00%
2005	$53.37	$2.75	$0.30	48.65%
2004	$48.16	$1.85	$0.30	444.12%
2003	$38.96	$0.34	$0.30	-40.35%
2002	$37.91	$0.57	$0.30	-

Growth Opportunities – 

Similar to my previous article on AGCO, best thing I like about CMI is the diversification it provides – it operates in 160 countries. This geographic diversity and broad product and service offerings help limit the impact from a drop in demand in any one industry or customer or the economy of any single country. Cummings brings 45% from North America and remaining 55% from foreign sales. As part of their growth strategy, Cummins invest in businesses in countries such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. The first thing any emerging /frontier countries will build is infrastructure and to build infrastructure companies need trucks/heavy machinery. Cummins captures that growth by provides engines for trucks. Countries across the world are tightening emission/carbon controls and customers will be forced to upgrade to eco-friendly vehicles.  

My bottom line –

I think Cummins operates in a very good market segment. It’s very hard for new companies to develop and get the penetration Cummins has. You pretty much get the growth of the entire industry around the world with one company. Some of Cummins customers are PACCAR, Navistar, Daimler Trucks North America, Ford Motor Company, International Truck, MAN Latin America, Volvo, Komatsu, Hyundai, Hitachi, Chrysler(RAM), JLG etc. So I’m not debating which automaker to buy, I’m just buying CMI to get exposure to the entire sector.

I bought CMI at $92.x in June 2012. CMI is fairly valued at PE 18.x (forward PE is 13.x) in line with S&P at 18.x. Earnings are expected to grow in FY14.

It carries little amount of debt of $754million. It has just cash of $1.5Billion. It has a current ratio of 2.1 (more than 1.5 is very good) and quick ratio of 1.3, so I’m not at all worried about debt.  

It pays a fairly good dividend for yield seekers. It pays 62.5 cents quarterly which translates to 1.8x based on today’s closing price. The payout ratio is only 25%. It has lot of room for dividend increases. 

I believe Cummins is rightly positioned to take advantage of world growth and I’m staying long CMI.