Will This Manufacturer Keep Producing Profits?

Equipment manufacturer Cummins (NYSE: CMI  ) has rebounded nicely after weathering its stock's decline to 2012 lows in July. With the stock now trading north of $100, however, is this tried-and-true industrial giant worth your investment?

A sparkplug of industry
Cummins operates across four primary business segments: It manufactures engines, components, and power generation systems as well as handles distribution services. The company has forged its brand over nearly 100 years, flourishing with the opening of the U.S. interstate highway system and spreading its manufacturing prowess globally.

Competition always evolves, however, and today's market is as merciless as ever. Cummins faces tough rivals such as major industrial giants Caterpillar (NYSE: CAT  ) and Honeywell (NYSE: HON  ) across all its manufacturing segments.

Cummins has plenty to celebrate, however. The company currently controls more than 40% of North America's heavy truck engine market. That number should only grow thanks to its recent deal with truck maker Navistar (NYSE: NAV  ) to offer Cummins engines in some of Navistar's trucks. Capitalizing on Navistar's position as the third-largest heavy-duty truck seller could reap Cummins a nice profit, even given sluggish demand due to the economy's woes. Whereas more diversified rivals such as Caterpillar reach out to many industrial segments, Cummins excels in locking down the niches it knows best.

International ebb and flow
The company has continued advancing its own products and producing new models, demonstrating commitment to research and development. Cummins has furthermore reached out to secure overseas cooperation, engaging in a joint venture with Indian car manufacturer Tata Motors (NYSE: TTM  ) to construct engines for the auto titan's truck lines. Investors should smile at these sorts of forward-thinking moves: Innovative ideas today will power Cummins' successes of tomorrow -- in the factory and on the balance sheet.

Financial setbacks have hurt the company in 2012, however. Cummins suffered a Q2 letdown when profit declined more than 7.1%, primarily over losses in engine demand in developing markets. China in particular hurt the quarterly report, as the manufacturer lost 25% of Q2 revenue there compared to last year. Updated 2012 forecasts for Chinese revenue paint a grim picture: Cummins predicts sales in the country to drop 13% from 2011. But given expectations of future Chinese economic growth, investors should keep a longer view of demand in mind when considering Cummins' fortunes in that market.

Still, Cummins will need to compensate in the short term. The company generated 52% of net sales in 2011 from its engine business, and a tough blow in China could significantly dent the manufacturer's near-term financial flexibility. With engine customers in virtually every geographic market, however, Cummins at least can survive shocks from any localized economic shakeup.

Strength among the strong
Cummins does stack up well on major financial metrics against the competition, an encouraging sign for investors looking for a good pickup in the manufacturing sector.

Company

P/E Ratio

Net Margin

Dividend Yield

Cummins 10.2 10.4% 2.0%
Caterpillar 10.1 9.0% 2.4%
Deere 10.4 8.7% 2.3%
Honeywell 20.5 6.1% 2.5%

Sources: Motley Fool CAPS and Yahoo! Finance.

Cummins may offer the smallest dividend (but not by much), but it also maintains a minuscule payout ratio of 16%. Combined with a sterling five-year dividend growth rate of more than 29%, the slightly smaller dividend shouldn't chase off income investors. Cummins stands with the largest peers in manufacturing as a financially sound corporation.

Hurdles like China's slowdown may hurt Cummins now, but this company has all the right pieces in place to succeed in the future. Recovering economic growth in Western nations will only contribute to manufacturing growth as businesses warm up to spending again. While investors should be wary of economic turbulence that could set back the manufacturing sector, Cummins has weathered the recessionary storm well and has built a promising future for its business and shareholders. Investors looking for a strong, solid stock could score with this pick.

The manufacturing sector as a whole will ride the strengthening economy upwards, and investors getting in on the game now can let the best stocks in the industry forge their financial future. Cummins isn't the only strong stock in the game; manufacturing titan Caterpillar has also paved a path to future success. Check out what you need to know about this industrial king by getting your copy of The Motley Fool's premium report on Caterpillar. The special guide comes with a full year's supply of updates, so pick up your issue today by clicking here.

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. Motley Fool newsletter services have recommended buying shares of Cummins. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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