Is Cummins Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Cummins (CMI 0.02%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Cummins' story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Cummins' key statistics:

CMI Total Return Price data by YCharts

Source: YCharts. *Period begins at end of Q1 2011.

CMI Return on Equity (TTM) data by YCharts

Source: YCharts. *Period begins at end of Q1 2011.

How we got here and where we're going
Cummins' performance has slipped from the near-perfect score it achieved last year, as the engine-maker musters a respectable (but not stupendous) five out of nine possible passing grades in today's assessment. Cummins' revenue growth was already reversing last year and has weakened further this year in the face of stiff competition over the past few quarters, which has also affected various bottom-line and equity-based metrics. Cummins' shares have now outpaced the company's net income growth during our three-year tracking period, which could lead to weaker returns in the future. Will Cummins be able to rebound to earn a rare perfect score next year? Let's dig a little deeper to see.

Cummins recently reported better-than-expected first quarter results after disappointing Wall Street for two consecutive quarters to close out its 2013 fiscal year. The company continues to benefit from its ongoing partnership with Westport Innovations (WPRT -0.61%), which integrates Cummins' engine technology with its natural gas combustion innovations to develop cleaner-burning heavy-duty engines. My fellow Fool Sean Williams notes that the Cummins-Westport joint-venture should benefit from recent Environmental Protection Agency regulations requiring cars to boast fuel efficiency of 54.5 miles per gallon by 2025, a big step up from the previous mandate of 35.5 mpg by 2016. Consequently, domestic trucking companies see opportunities to shave off significant operational costs by using natural-gas-powered trucks while diesel prices continue hover near all-time highs.

Fool energy specialist Jason Hall notes that Cummins-Westport expects to ramp up production of its 12-liter engine, which should soon show up as a financial lift for both Cummins and Westport. Cummins-Westport president Gord Exel envisions increasing adoption of the company's ISX12 G engine, which will also reduce the company's warranty costs to support its older 8.9-liter engine. Meanwhile, complementary nat-gas trucking industry company Clean Energy Fuels plans to add 150 fueling stations to America's Natural Gas Highway this year, bolstering the sparse refueling infrastructure for longer-haul trucks.

Going forward, Cummins should also benefit from more stringent carbon emission standards in Europe and China. Heavy-duty truck manufacturers have already upgraded their production forecasts for North American markets, according to Bloomberg -- PACCAR (PCAR -1.87%), a key customer, expects North American Class 8 truck sales to fall in the 220,000 to 240,000 range. Navistar International and Nissan have also announced plans to install Cummins' diesel engines in their heavy-duty truck platforms. But PACCAR has ramped up production of its in-house MX-13 engine for its Peterbilt and Kenworth brands, which will reduce Cummins' dominance of the heavy-duty truck engine market. PACCAR is also working on developing its own 13-liter spark-ignited natural gas engine, which could further undermine Cummins' growth prospects in an increasingly competitive arena.

Putting the pieces together
Today, Cummins has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.