Cummins' Big Competitive Advantage

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Andrew: Hey Fools, Andrew Tonner here. I'm joined today by Brendan Byrnes, our Industrials Analyst for Fool.com.

Brendan, let's take a look at kind of a transformative play over the last 10 years, Cummins. When you look at them today, do you still like their investment prospects, going forward?

Brendan: Cummins; very interesting story over the last 10 years.

It really transformed itself, and now one of the biggest competitive advantages for this company is its ability to keep current with technology, and what that allows it to do -- unlike some other competitors -- is meet these EPA standards and successfully sell these engines as they get more strict with emissions control.

Look at their biggest competitor. Navistar is actually having to use Cummins' 15-liter engine, selling it themselves. How often does that ever happen? That shows you the competitive advantages of this company, that they have right now. That's certainly good news.

This stock has had a little bit of an increase recently, over the end of the quarter last year, but at the same time I still think this remains an attractive stock in an attractive sector. They have a joint venture with Westport Innovation, so you can see the innovation -- they're going into natural gas engines.

But they're not just resting on that. They're also branching out and doing their own 15-liter natural gas engine. That's in development, scheduled to start production in 2014. Definitely good news there; we like that Cummins is certainly still an innovator, as it once was and should continue to take advantage of these EPA standards.

Also, you look at this as more of a diversification play. They get over 60% of their sales from outside the United States, so if you're looking for more international exposure in your portfolio, Cummins could be a good candidate for that.

Also about 60% of their sales come directly from engines, about 30% from parts and services, which is strong, recurring revenue, which is definitely good news for this company.

Overall, I think it's in an under-appreciated sector, despite the recent run-up we talked about over the past quarter or so for these big manufacturers. I still think a lot of them are trading at depressed multiples.

You look at Caterpillar, it remains a cheap stock, under 10 times earnings. Also a Deere I think remains cheap, and poised to capitalize on the food boom that is going on in developing countries. Also look at Joy Global, a mining manufacturer that's just very cheap right now, and a potential buy out candidate.

I think it's an underappreciated sector. I think Cummins is a good bet for manufacturing when you talk about the long term. My favorite in the space probably continues to be Caterpillar, but I still don't think you can go wrong with Cummins as far as their competitive advantages as a long-term diversification play.


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