Wednesday, August 29, 2007

Cummins Cleaner Truck Engine Fuels Overseas Sales, Market Share

By Candice Zachariahs

Aug. 29 (Bloomberg) -- Cummins Inc. is getting a lot of mileage out of light-duty diesel engines that meet or exceed current, even future, emissions standards.

The Columbus, Indiana-based company has developed a less- polluting pickup truck engine, three years ahead of a U.S. deadline for tougher exhaust standards. It's also entering the market for light commercial vehicles with an agreement to supply Chrysler LLC with engines for its Dodge Ram 1500 pickup.

Cummins's breakthrough positions the company to more than double its sales in China to $3.3 billion by 2010, extending its market lead as tighter emissions regulations fuel the need for environmentally friendly vehicles. With more than half of its revenue coming from outside the U.S., global demand for Cummins's greener engines might add about $2.50 to earnings per share by 2010, said Andrew Casey, an analyst with Wachovia Capital Markets.

``The company has one of the best growth profiles in our universe, and we continue to believe the stock has significant upside potential from current levels,'' Boston-based Casey wrote in an Aug. 13 report. He's one of four analysts with a ``buy'' recommendation on the shares, while six say ``hold'' and three rate them ``sell.''

Cummins, up 85 percent to $109.31 so far this year in New York Stock Exchange composite trading, may rise an additional 24 percent to as much as $135 as the company grabs 30 percent of the global market share related to changes in emissions standards, Casey wrote.

Refurbished Plant

``It's almost as if Cummins welcomes additional emissions regulations because they have great capability in terms of research and engineering,'' said Charlie Rentschler, an analyst with Wall Street Access who worked with Cummins for 10 years and doesn't own the stock. ``Come 2010, which is the next big hurdle for the on-highway truck engine companies, I think Cummins will do very well.''

It didn't look that way five years ago as U.S. engine manufacturers were forced to meet new rules or face penalties of as much as $12,210 per non-compliant engine.

On Oct. 16, 2002, Cummins's stock plunged 14 percent after Standard & Poor's cut its debt to junk, citing slowing sales. One week earlier, Cummins said it would eliminate as many as 400 jobs and reduce capacity at its Columbus engine plant, which opened in 1926.

``Now, of course, they're refurbishing that plant, spending $250 million to put the lightweight diesel-engine facility in there,'' Rentschler said. Rival Navistar International Corp. and automaker General Motors Corp. have yet to produce a diesel engine that meets the U.S. Environmental Protection Agency's 2010 emissions standards.

Meeting Standards

The 2002 emissions deadline forced Cummins to start looking at the regulatory changes as a source of competitive advantage.

``We felt at the time that we had the opportunity to capitalize on the emissions standards and our competitors were unable to meet it,'' Jim Kelly, president of Cummins's engine business, said in an Aug. 27 interview.

Cummins has boosted research-and-development spending 60 percent since 2002. Of the $321 million spent last year, $72 million, or 22 percent, was directly related to the 2007 and 2010 on-highway emissions changes.

The number of diesel engines affected by regulatory changes worldwide will grow at a compound annual rate of 35 percent, Peter Nesvold, a New York-based analyst with Bear Stearns & Co., wrote in a July 9 note to investors.

By 2014, they will number about five million annually, Nesvold said. Cummins operates in this niche both as an engine maker and a supplier of components such as catalytic exhaust systems and diesel-particulate filters.

$5 Billion Opportunity

``More of our products are being used in each engine sale, not just on Cummins engines,'' Chief Executive Officer Tim Solso said on an earnings conference call in July.

The U.S. and Europe lead the rest of the world in exhaust standards. Large emerging markets such as China, India, Brazil and Mexico will implement European standards over the next few years, each on its own schedule.

Solso has put the company's combined opportunity in China and India at $5 billion by 2010, up from just over $2 billion. The company predicts sales in China will increase to $3.3 billion in 2010 from $1.2 billion last year, Rentschler wrote in a March 20 report.

Cummins said it is the largest foreign investor in the diesel engine industry in China, where it sold its first engine 30 years ago. It now has 13 manufacturing plants in the country and 12 distributor locations.

Clean Machines

Demand for heavy-duty trucks in China will reach 200,000 annually by 2010, Cummins said. That might add 75 cents to $1 to earnings per share by then, Wachovia's Casey wrote.

Xi'an Cummins Engine Co., a joint venture with China's Shaanxi Automobile Group, began producing 11-liter engines in early August. They are compliant with current U.S. and European emissions standards, which China will introduce in 2010.

A venture with Beijing-based Beiqi Foton Motor Co. is part of Cummins's plan to start manufacturing light-duty diesel engines in China, a market it's also planning to enter in the U.S.

In January, Cummins unveiled a 6.7 liter engine for Dodge's 2500 and 3500 heavy-duty pickups, compliant with 2010 EPA standards.

The engine is the cleanest heavy-duty diesel in North America, reducing nitrogen oxide and particulate-matter emissions by more than 90 percent over the 2004 standards, the company said in January. Cummins said it controls more than 30 percent of the heavy-duty diesel engine market in North America.

Dirty Reputation

The number of diesel-powered passenger vehicles sold in the U.S. rose to 526,000 last year, or 3.2 percent of the total, up from 2.2 percent in 2000, according to J.D. Power and Associates.

One of the biggest hurdles to quicker growth has been the ``bad baggage'' of the negative perception of diesel engines as dirty and noisy, said Eli Lustgarten, an Ohio-based analyst with Longbow Research.

By changing the way its engines process fuel, Cummins has scrubbed diesel exhaust of contaminants including minuscule particulates, Kelly said.

``Technologically they are leading the rest of the industry at this point,'' Nesvold said. He rates the shares ``outperform'' and doesn't own any.

Cummins is on pace to produce 700,000 light-duty engines by 2011-2012, Rentschler wrote. The Columbus plant will produce engines for the Dodge 1500 light-duty pickup to be introduced by the end of the decade.

``This will probably be the most fuel-efficient pickup truck ever,'' Nesvold said. ``And that will market very well in an era of $70-a-barrel oil.''

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