Why Cummins Might Beat Expectations in 2013
The end of the year is a great time for investors to look back on their investments. While it may not be a solid indication of what to expect in the coming year, it does lend perspective. Today, let's take a look at Cummins . Despite an up and down year on the market, the company has rounded off the year rather well by outperforming the S&P 500 by six percentage points.
How it's done in comparison to its peers:
Company | Profit Margin | Return on Equity | Debt-toEquity | P/E | Dividend Yield |
|---|---|---|---|---|---|
Cummins | 10.15% | 30.89% | 11.72% | 11.8 | 1.9% |
Caterpillar | 9.74% | 40.34% | 222.26% | 10.8 | 2.4% |
Deere | 8.48% | 44.92% | 474.37% | 9.68 | 2.1% |
Source: Yahoo! Finance
Cummins in 2012
To some degree, 2012 could be considered the year of the shareholder for Cummins investors. Throughout the year, the company has bought back $231 million in shares as part of its $1 billion buyback program back enacted in February of last year. Management must have seen some success in the program, because it just announced that it plans to start up another $1 billion in share buybacks earlier this month.
This second round of buybacks also comes following the company's decision last July to raise its dividend by 25%. This jump puts the yield close to the S&P's average for dividend yield. What makes this jump reassuring for investors is that the company still has a payout ratio of 18%, a very manageable level.
What a Fool believes for 2013
Like its peers, Cummins' performance could be considered a bellwether for macroeconomic trends. With so much of its business dependent upon the capital expenditures of construction, transportation, and mining, it shouldn't come as a surprise when a company like Cummins takes a hit as global growth slows down.
Even though the macroeconomic outlook doesn't appear too rosy right now, there are three drivers that could help keep Cummins hauling along:
Resurgence of Chrysler: Have you seen one of those tough guy Ram Pickup truck commercials where a narrator talks about the durability of these trucks and their Cummins engines? Apparently it's working. Orders from Chrysler jumped 81% last quarter on a year-over-year basis. Light-duty vehicle engine sales represent about 8% of the company's revenue. So while this may not completely change Cummins' business, a strong showing from Chrysler could help to pad top-line growth.
Heavy-duty truck fleet age: I will concede that the quality of heavy- and medium-duty trucks has gone up. With that better quality, we can expect to see longer lifespans for these vehicles. But the average age of these trucks is approaching 6.9 years, a statistic approaching an all-time high. So even without an increase in trucking demand, overall sales could see a rise to maintain existing fleets. Cummins recently inked a deal with Navistar to supply the truck maker with engines and its proprietary antipollution devices for some of its heavier-duty offerings. At about 28% of the company's revenue, a jump in sales from this sector could mean very good things for the company.
Cheap natural gas: Yes, we Fools certainly have mused often about the effects of natural gas on the transportation industry. But there is some rationale behind our ramblings. This fuel could be a game-changer for heavy-duty truck engine makers. Not only is it cheap compared to diesel, but it's an EPA darling as well. Thanks to fuel tax incentives and CAFÉ standard credits for natural gas vehicles, don't be surprised if automotive manufacturers try natural gas engines in some of their more fuel-demanding vehicles like light-duty trucks. Thanks to Cummins' relationship with Westport Innovations , it is well-positioned to feed any demand for natural gas engines.
As the most-advanced designer of engines powered by natural gas, Westport Innovations is a small company with a big goal: to lead the world in transitioning away from traditional oil-based fossil fuels in favor of abundant, cheap, and clean natural gas. The company has a price tag large enough to match its ambition, and will need to grow revenue quickly in order to justify sky-high expectations. To help you determine whether Westport Innovations is right for your portfolio, The Motley Fool has just released a brand-new premium report breaking down the company's opportunities, competitive advantages, and risks. To get started, simply click here now for instant access.
The article Why Cummins Might Beat Expectations in 2013 originally appeared on Fool.com.
Fool contributor Tyler Crowe owns shares of Westport Innovations. You can follow him on Fool.com under TMFDirtyBird, Google +, or Twitter @TylerCroweFool. The Motley Fool owns shares of Cummins and Westport Innovations. Motley Fool newsletter services recommend Cummins and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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