What Makes Cummins One of America’s Best Companies

Since 1919, Cummins (NYSE: CMI  ) has been a leader in the design and manufacture of world-class, high-performance engines. Today, Cummins' engines are renowned for their reliability, fuel efficiency, and low emissions, and can be found in long-haul trucks, buses, light-duty vehicles, and heavy equipment for construction, agriculture, and mining.

Engine sales account for only half of revenue. The remainder comes from power generation equipment like diesel generators, components like the company's state-of-the-art emissions solutions and fuel systems, and distribution. Based in Indiana, Cummins products are sold worldwide: International markets provide about 60% of revenue, and Cummins is well-positioned in fast-growing geographies like Brazil and China.

Cummins' stock has stalled out over the past two years, falling relative to the S&P 500. However, between the introduction of tougher emissions regulations worldwide and the trucking industry's need to fill pent-up demand from the recession, investors shouldn't be surprised to see Cummins roaring back.

The case for Cummins
It's easy to be sustainable in an industry like software or up-scale retail, when your business isn't very environmentally intensive in the first place. But as a manufacturer, especially an engine maker, one might expect that Cummins would have to use lots of resources and create lots of pollution in order to stay competitive. Nothing could be further from the truth.

Cummins has aggressively cut its own greenhouse gas emissions, beating its own goals by reducing emissions by 28% from 2005 levels in 2010. This achievement allowed the company to win the EPA's inaugural Climate Leadership Awards. Now Cummins has set an ambitious goal of reducing emissions 40% from 2005 levels by 2015.

For its own products, Cummins views tighter fuel efficiency and emissions regulations not as obstacles, but as opportunities to showcase the company's market-leading technology in making the cleanest, most efficient engines. Cummins has a big presence in the natural gas engine market through its joint venture with Westport Innovations (NASDAQ: WPRT  ) , and as a fuel source, natural gas is not only cheaper than petroleum, but dramatically cleaner, helping truckers save money on fuel and contributing fewer particulate pollutants and greenhouse gas emissions.

Even Cummins' diesel engines are among the world's cleanest. Cummins' clean diesel technology advantage was demonstrated powerfully in 2012, when integrated truckmaker Navistar International's (NYSE: NAV  ) own engines were found to be non-compliant with EPA standards. As a maker of both truck bodies and engines, Navistar had historically been a competitor to Cummins. When the EPA doubled its fines on the non-compliant engines, Navistar was forced to buy engines and component technology from Cummins in order to continue operations, transforming from major competitor to major customer at a stroke.

Navistar might not be happy about the performance of its own engines, but it should be happy with Cummins. JD Power & Associates has measured customer satisfaction for heavy-duty engines for over 15 years, and Cummins routinely ranks first or second in this study. This consistent level of quality and satisfaction has granted Cummins a brand power that allows it to charge a premium for its engines, supporting a return on equity over 30% recently. While Cummins' shares have stumbled over the past two years, the company's been a winner over the long term, returning 170% to shareholders over the past five years.

As more countries adopt progressively stricter efficiency and emissions standards, Cummins' technological edge should prove an enduring advantage. To prepare for what it sees as a bright future worldwide, Cummins has been investing in its workforce by launching the Technical Education for Communities program, a charitable endeavor that provides youths in economically disadvantaged areas the skills and experience needed to gain good jobs in manufacturing industries like Cummins. The program launched in poor communities in China, India, and Morocco, with more planned in other Cummins communities.

The Foolish bottom line
Cummins' work contributes greatly to a safer, greener world, and its commitment to environmental leadership and workforce development is admirable. Over the long term, shareholders have been richly rewarded, as well.

Click here to read about the rest of The 25 Best Companies in America.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2013, at 8:01 AM, prginww wrote:

    I have some minor familiarity with how poorly Cummins treats it's suppliers. Without constant badgering of purchasing, you will never be paid for services rendered. With good connections and a stream of ongoing work, you may be able to hold them hostage with current work to get past due bills paid. Hope for 120 days delinquent, plan for 6 months and 80% of full fare. Never tie a small progress payment or completion payment at the end. It will simply never be paid.

    The auto industry treats it's supply chain atrociously. Cummins is better than GM. But that sets the bar awfully low.

    This is true with engineering services, IT services, and parts suppliers.

  • Report this Comment On March 03, 2013, at 6:51 AM, prginww wrote:

    Yes, big companies do treat small suppliers badly and it's another spot where Capitalism should be constrained (I can't see why it isn't simple to agree that everyone should pay bills within 60 days, or something similar).

    But I know something of Cummins in Huddersfield UK and they really are experts, focussed on what they do. I hold CMI and have been a bit surprised at their rise in value. I think they gotta be Fully Priced now. But not to sell.

  • Report this Comment On March 03, 2013, at 11:56 AM, prginww wrote:

    Fully priced? I dunno, their forward P/E is only 11 and they're positioned for strong earnings growth. I'd buy at these prices.

  • Report this Comment On July 05, 2013, at 8:30 PM, prginww wrote:

    Maybe they could design and manufacture a decent dividend. They must be giving all their money to their employees. They can always hope their employees will buy their shares, because they don't make it worth the while for investors.

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