Is Cummins Worth More Than $100 a Share?

Some investors think fishing at the shallow end of the stock pond among penny stocks is where they'll land the biggest returns. While a move of just a few pennies might net you a whopper, it's more likely to have you falling hook, line, and sinker into the weeds of fraud and manipulation.

Instead try casting your line to the other end of the price spectrum, among stocks that trade north of $100 a share. These three-digit stocks (and sometimes they trade for four, five, and six digits) can oftentimes have you telling a whale of a tale of multibagger returns.

But regardless of how much it costs, it always comes down to whether the business is well run. We'll check in with the smart set at Motley Fool CAPS to see which high-priced honeys they think are selling something fishy, and which ones they believe ought to be mounted over the mantel.

Today we're looking at engine-maker Cummins (NYS: CMI) , whose shares have rallied 29% from their recent lows and which is garnering top honors at CAPS.

Cummins Snapshot

Highfalutin honeys
Trucking giant Navistar (NYS: NAV) was forced by the EPA to abandon its alternative -- and cheaper -- emissions technology in favor of that used by the rest of the industry. Tough new air quality regulations put Navistar's trucks out of compliance and buyers became leery of purchasing the vehicles. Fitch Ratings recently downgraded the trucker's credit and said more downgrades could be forthcoming if it didn't resolve the problem in a hurry. As a result, Navistar announced it would start using exhaust treatment components made by Cummins in its trucks starting in January.

The decision cements Cummins' position as the industry leader with more than 40% of the share of the engine market. It provides similar technology to heavy-duty truck maker PACCAR (NAS: PCAR) , which owns 30% of the market for class 8 trucks -- the biggest trucks on the road -- in the U.S. and Canada. PACCAR makes the Kenworth and Peterbilt brands and accounted for 12% of Cummins' revenues in 2011.

Crunch time
While both PACCAR and Cummins saw per-share profits widen in the most recent quarter, both also warned that global economies could force them into the slow lane. The truck maker is expecting the back half of the year to see weaker truck orders, while Cummins offered up flat revenue guidance for the year of $18 billion, the same as it recorded in 2011. Consolidated sales in the second quarter were down 4% while its engine segment was down 2%. Other segments saw flat sales, though parts and service inched up 1% from the year-ago period.

Oshkosh (NYS: OSK) , however, offered up a contrary opinion, expecting higher growth after reporting better-than-expected third-quarter results. While the economy is in the slow lane, it said, it's still moving forward.

Yet U.S. manufacturing slowed down for the second straight month in July as the Institute for Supply Management's index stayed below 50, indicating a contracting economy, and international markets are substantially weaker, too, with even China barely showing growth in July but leaders expecting further slowing.

The real opportunity
Perhaps a more promising alternative will be the natural gas engines Cummins is developing, though the real payoff is still some years away. Of course there's the joint venture it has with Westport Innovations (NAS: WPRT) , but it announced earlier it was going off on its own too and will be developing a 15-liter on-highway heavy-duty engine. The transportation industry has been most receptive thus far to the alt-fuel engine, and Cummins obviously sees more growth coming, which is why it's heading its own way.

Value is what you get
At just 10 times earnings and estimates, Cummins certainly looks cheap, and when you factor in analyst growth rates it seems below fair value, but with the engine-maker's enterprise value trading at 18 times its free cash flow, it might not be a bargain-basement stock. Not wildly overvalued, but not a screaming buy, either.

Highly rated CAPS All-Star Chemdawg still believes that by having all the bases covered on engines -- diesel or natural gas -- it wins regardless of which route the market takes. But you can tell us whether a price just north of $100 makes Cummins worth more still. I think it does, so I'm rating it to outperform the market indexes on CAPS; I just don't think the upside is as large as it was just a month ago.

A sky-high opportunity
It's technology that's driving Cummins forward, but a different kind of technology may just set manufacturing on its ear -- and it's made right here in the U.S. The Motley Fool has the ins and outs covered in a special report, "3 Stocks to Own for the New Industrial Revolution," that is available free of charge. You can find out which companies will end the "Made in China" era for good by downloading the report today. Get your copy now, as it's available for a limited time only.

The article Is Cummins Worth More Than $100 a Share? originally appeared on Fool.com.

Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Westport Innovations.Motley Fool newsletter serviceshave recommended buying shares of PACCAR, Westport Innovations, and Cummins. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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