The biggest question for investors in engine, power generation, and parts company Cummins (NYSE: CMI) is whether things will be different this time. That is, has the company done enough to insulate itself from the cyclical ups and downs of the truck market and crafted a business model that can grow even when the truck purchase cycle heads back down?
Of course, only time will tell.
For now, though, growth is strong, and management is feeling better about the year to come. Sales for the fourth quarter rose 17% as reported, with every business growing revenue by a double-digit percentage. Engines led the way with 22% growth. Just as impressive to this Fool, however, was the improvement in gross and operating profitability. Working through higher materials costs and holding the line on sales, general, and administrative expenses allowed the company to grow operating income by 60% and net income by 46%, after excluding tax benefits in the two comparative quarters.
Overall engine shipments rose just less than 22% for the quarter, with mid-range engines leading the way at 24.5% growth. Sales were up by a like amount (22%), and both the on-highway and off-highway markets were quite strong. While the power gen, distribution, and components businesses didn't produce as much revenue or revenue growth, each of them saw segment earnings before interest and taxes (EBIT) grow faster than sales.
All of this performance is great, but the question in the opening paragraph is likely to be what really guides the stock. Do you believe that Cummins has restructured itself in such a way to break free from the cyclical aspects of the engine business? Certainly, the company has looked overseas for help, having built up its business in China, Russia, and India, where it has a joint venture with Tata Motors (NYSE: TTM).
The company has also built its position in the non-engine businesses. That's not a bad plan -- other industrial companies, like Ingersoll-Rand (NYSE: IR) and Danaher (NYSE: DHR), have become somewhat less cyclical by mixing in different businesses. But all that we can really say for now is, "We'll see."
If Cummins has, in fact, unchained itself from the cycle, then the stock could still have room to grow. If, however, you believe that it's not so different this time, you should probably exercise some caution and do an above-average level of due diligence and modeling work before buying the shares.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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