Shrink! Buybacks of 10 Undervalued Stocks

Stock buybacks are generally considered a bullish signal on Wall Street. They often announce management's belief that its stock is cheap, and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.

How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.

We're seeking companies that have announced stock buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the 77,000-strong investor community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take notice.

Here are some of the latest companies to announce share repurchase programs.

Investors at CAPS generally like this group of companies. Only Visteon, the ailing auto-parts supplier for the equally beleaguered Ford (NYSE:F), ranks less than three stars.

Revving its engines
You'd expect to see heavy-duty engine maker Cummins suffering this year. Last year, truck buyers rushed to make purchases before stiff new EPA regulations came into effect. For many in the industry, that's made 2007 a tough year by comparison, and some analysts don't see the overall truck market improving until well into 2008. Yet Cummins keeps chugging along.

In part, that's because a growing proportion of its products are sold overseas, particularly in China. Overall, international unit shipments were up 37% last quarter from 2006 levels, and international sales now make up 52% of total net sales for Cummins. That global diversification has left Cummins in better shape than many of its North American competitors.

CAPS All-Star ypcheng, with a 89.44 player rating, cites the business's global nature to justify an outperform rating:

In global economy, the US recession doesn't mean the rest of the world are not buying heavy industrial equipment. Forward PE looks very good for this company. Buying back their own stocks indicates the anticipated growth.

The company's fuel-efficient engines have attracted CAPS player steyr911, who sees Cummins as well-positioned for the future, when the general public embraces those engines completely:

Nice looking financials, markets opening in asia. Well positioned for the long haul with clean, efficient, dependable engines. There's going to be a push towards diesel/biodiesel in the not too distant future because the fact that they're simply cleaner than gas engines can be and wont require as much subsidy money from the government or an infrastructure change like switching to battery or hydrogen powered cars respectively will require. Those technologies are still pretty far off and it'll be a while before Johnny middle class will be buying them en masse.

Foolish fallout
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