Cummins: Diesel Dollars

04/02/2014 7:00 am EST

Focus: STOCKS

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

Our latest featured value stock is a firm that designs and manufactures diesel and natural gas engines, and electric power generation systems, explains Charles Mizrahi, editor of Hidden Values Alert.

Cummins (CMI) was founded by chauffeur Clessie Cummins to improve on what he felt was an outdated and inefficient technology.

He began producing diesel engines for trucks in the 1920s, but manufacturers were reluctant to switch from gas to diesel. During WWII, the Cummins engine was used in cargo trucks. In the decade following the war, sales increased fivefold, cracking the $100 million mark in 1956.

During the same year, the company began its overseas operations with its first international plant in Scotland. Within ten years, it controlled half of the diesel engine market.

In 1993, the company introduced a natural-gas engine for school buses. A couple of years later, it entered a joint venture to produce high-speed diesel and natural gas engines.

Geographically, the US and Canada region generated the most revenue for the company. CMI's engine segment accounted for nearly half of 2013 revenue.

Within this segment, on-highway products (trucks) were responsible for 62% of revenue. While the segment had a slight decline in 2013, management expects it to rebound in 2014, given the strong recovery in truck orders over the past couple of months.

CMI announced a 12-liter natural gas engine in a joint venture with Westport Innovations. The engine offers reduced fuel costs and emissions compared to other natural gas based engines. It is a game changer in the long-haul trucking sector and serves a strong catalyst for CMI's stock going forward.

The company has more than $4 billion of cash and investments on its balance sheet. It generated nearly $3.5 billion in free cash flow in the past three years.

Management allocated $2.4 billion to CMI's dividend and stock repurchase program during the same time period. Shares outstanding fell by more than 5%. Its $2.5 annual dividend represents a 1.7% dividend yield.

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