Thursday, August 9, 2007

Cummins' record growth a bright spot in troubled industry

Thursday, August 9, 2007 12:45 PM CDT


COLUMBUS, Ind. - Six years ago, diesel engine maker Cummins Inc. had to cut hundreds of jobs and reported an $18 million quarterly loss.

Investor Mark Foster bought thousands of the company's shares a couple years after that because the price lingered around $30 and he smelled a bargain.

Keen instincts on his part. That price has since soared more than 300 percent, topping $120 a share before a recent dip.

Cummins is a bright spot in an industry hit by slumping demand for pickup trucks, tougher emissions standards and a heavy-duty diesel engine market that's down 40 percent this year in North America. Analysts say the once mediocre performer became a Wall Street darling thanks to an improved product portfolio, strong international sales and a technology break.

"This feels like it wants to be a $150 stock," said analyst Peter Nesvold, an analyst who covers the company for Bear, Stearns and Co.

When Foster bought his shares, "people had just kind of given up on the business," he said. "They hadn't made significant money for years."

But now, many parts of the business are humming like its midrange engine plant in Columbus, which runs three shifts at least five days a week.

Cummins makes 350-horsepower engines for heavy-duty Dodge Ram pickup trucks at the plant, where the 1,100-pound engines hang from conveyor belt chains and fork lifts buzz back and forth as a portable radio plays country music.

The company has sold a growing number of these engines nearly every year since 1988. For 2007, Cummins is on track to make about 170,000 engines _ an increase of nearly 50,000 since 2003 _ even though overall U.S. pickup sales have dropped mainly due to a housing industry slump and high gas prices.

"At the high end, people really want the diesel, and they've held on pretty well," company spokesman Mark Land said.

But analysts say that engine alone hasn't pushed Cummins from 296th to 221st on the Fortune 500 list. The rest of its portfolio, which includes heavy-duty diesels, power generators and components like filters, fuel systems and turbochargers, has grown impressively.

The company's Emissions Solutions business, which started in 2005, raised $150 million in sales last year and should finish with more than $450 million this year, Land said.

Foster sees this portfolio as a three-legged stool supporting the company instead of the one-legged stool it was when Cummins leaned more on heavy-duty truck engines.

"Every couple years, somebody would come along and kick that leg out because of the cyclicality of the business," he said.

Cummins recorded $11.3 billion in sales and $715 million in earnings in 2006, the company's third-straight record year for both categories. It could push that streak to four if it hits its full-year guidance for 2007, Land said.

"This company has had a superb stock run because of tremendous financial improvement," said Eli Lustgarten, a Longbow Securities analyst.

Cummins, which employs 34,600 people worldwide, announced last fall plans to add as many as 800 jobs in central Indiana to build a new diesel engine for pickup trucks and sport-utility vehicles.

International sales are up about 33 percent this year and will outpace U.S. business. In China and India alone, the company expects annual sales from its joint ventures to climb from $2 billion to $5 billion by 2010.

A strong presence overseas is a key part of Cummins strategy, according to Land.

"You might be down in one part of the world, and another part is booming," he said. "If you're playing in all these markets, you've hedged your bets."

Cummins gained another boost in January when the federal government tightened emissions restrictions for on-highway diesel engines. The company started churning out engines that meet those standards at the start of the year, much sooner than competitors like Caterpillar Inc.

"We were there when people wanted to buy engines early on, and not everyone was," Land said.

That puts Cummins in great shape to respond when tighter standards reach other markets, Nesvold said.

"You've already hit the toughest standard in the world, and now the rest of the world is going to catch up to you," he said.

Two years ago, Nesvold wasn't recommending the Cummins stock. He thought business might slow after the new emission standards hit. Now, he believes the company is "uniquely positioned" to grab a lot of market share.

"Certainly this has been one of the most impressive runs in the machinery sector," Nesvold said.

Unfortunately for Foster, he won't reap the benefit. The chief investment officer for Kirr Marbach and Co. sold his Cummins shares when the price reached $45.

They've since climbed as high as $147 before an April stock split chopped the price in half. Cummins shares traded for $112.32 at midday Thursday.

"We made pretty good money, but I certainly didn't envision this last go around," he said.

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