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Cummins: A Safe Harbor
10/02/2015 8:00 am EST
Our latest investment idea is a large, multinational company that designs, manufactures, and distributes engines, filtration, and power generation products, explains Jimmy Mengel, editor of The Crow’s Nest.
Cummins, Inc. (CMI) sells in about 190 countries through 600 distributors, many company-owned.
A company like Cummins tends to take a large hit during a recession, but it is able to quickly rebound.
And recently, Cummins has been pretty beat up; the stock is down about 20% from 2014, so right now looks like a great time to start a position and begin to dollar-cost average.
Even in a very tough global export market, Cummins has been able to weather the storm.
Despite the fact the foreign sales and earnings are down and it's getting nailed on its exports due to the strong dollar, the company still exceeded earnings expectations, mostly due to its great performance in North America.
In spite of the weakness in China's economy, Cummins has continued to increase its market share, as the Chinese government has continued its pledge to strengthen emissions standards, a boon for Cummins clean engine technology.
This should be huge for Cummins in the long-term, especially when China starts rebounding. In fact, we're going to need clean engines for the future globally and Cummins is a sure bet to provide them.
Another major driver for Cummins' future may come from a brand-new project that has the potential to crack a $5 billion market.
The brand-new 16-cylinder QSK95 diesel engine—called the “hedgehog”—is Cummins' largest diesel engine ever. It clocks in at eight feet tall, 14 feet long, and is capable of producing 4,000 horsepower.
In fact, it's the single most powerful engine ever built for off-highway markets like locomotives, mining, marine, and power generation.
It also sports some serious environmentally-friendly specs that should satisfy larger markets' desire to cut emissions.
They are on schedule with commercial production and first shipments should begin next year.
Aside from the obvious need in China, Cummins is looking to tap into the Hedgehog's strength to supply India's massive rail network.
In addition, Cummins has been generous with its dividends, something we always look for in our positions. It has raised dividends every year for six years, including 2009.
It hiked it another 25% in July and is now yielding 3.25%. It also offers a dividend reinvestment play.
We're loading up on shares under $130 for now and dollar-cost averaging as we keep navigating these choppy waters. Cummins is a safe harbor stock trading at a discount.
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