Unlike competitor Caterpillar (NYSE:CAT), which blamed highersteel costs for its earnings shortfall last week, Cummins (NYSE:CMI) was able to turn strong demand into better-than-expected profits. The diesel engine manufacturer reported surprisingly strong earnings growth on Friday. Net income grew to $1.76 per share from $0.34 per share for the same quarter a year ago, $0.36 ahead of previous guidance to analysts. Subsequently, the stock gained $2.89, or 4.66%, to close at $64.90.
The company cited strong sales to construction and mining equipment manufacturers as well as to heavy- and medium-duty truck manufacturers. The company said orders for diesel engines for DaimlerChrysler's (NYSE:DCX) Dodge Ram trucks grew 30% alone. With regular gas prices about $0.20 higher than diesel fuel prices, Dodge Ram truck buyers may be looking at the Cummins 600 5.3-liter diesel engine as a better alternative to the 5.7L Hemi V-8 and the monstrous 8.3L Viper V-10 options that will suck more cash from their wallets. Any way you slice it, Dodge Ram trucks cater to the man's man.
But enough about virile trucks -- the real question at hand is, "Is Cummins a potential investment?"
The first thing that came to my mind is Peter Lynch's thoughts on buying Phelps Dodge (NYSE:PD) in his classic Beating the Street. He would buy this cyclical stock when the price-to-earnings ratio was high. Earnings would be down sharply while the price had not fallen as far. Then, he would sell it at low P/E multiples when earnings would shoot back up during times of high demand.
Cummins is a cyclical stock as well. With earnings guidance revised to $5.50 to $5.75 for 2004, Cummins' forward P/E ratio is now about 11. Unfortunately, I believe this means that Peter Lynch would be selling right now instead of buying.
P/E ratios are very good indicators when evaluating cyclical stocks. So don't be fooled by strong demand at Cummins. Although the company is cranking on all cylinders, investors buying today will be racing against investors who have already left the starting line.
Fool contributor David Meier has a manly V-8-powered Ford Bronco, but he does not own any of the stocks mentioned.
