Engine maker Cummins (NYSE: CMI) is all charged up. Its shares are up a whopping 40% year-to-date, and it reported mind-boggling numbers in its last quarter. But is it totally free from weaknesses? No company is perfect, and only a detailed scrutiny can give us a clear picture. Let's take a look at where Cummins stands.


  • Global play. After getting a strong foothold in rapidly growing markets like India and China, Cummins is now expanding into Russia, Africa, Turkey, and Indonesia. International markets accounted for nearly 59% of the company's total sales last year. Also, nearly 50% of the total projected capital expenditure for this year will go toward the overseas market.
  • Impressive tie-ups. Cummins has tie-ups with some of the top names in the industry. Some prominent ones worth mentioning are its 50:50 joint venture with leading Indian automaker Tata Motors (NYSE: TTM), alliances with Komatsu, and the partnership with Westport Innovations (Nasdaq: WPRT).
  • Strong research and development. Cummins has consistently invested in innovative products and technologies, spending nearly $622 million in 2011. It plans to shell out at least 30% more this year. The company has been spending to meet emission standards and unlike peer Navistar (NYSE: NAV), which is bearing the brunt of warranty claims, Cummins' warranty costs were at a 15-year low in 2011.
  • Solid financials. Picture this: a total debt-to-equity ratio of just 11.8%, an interest coverage ratio of a whopping 48 times, unlevered free cash flow of more than $1 billion, and cash equivalents of $1.5 billion (as of Dec. 31, 2011). It's not every day that one comes across a company with such impressive financials.


  • Single-source supply.  Cummins single sources 60%-70% of its product parts requirement. This is risky, as any issue with the supplier could stall part of Cummins' business.
  • European concern. Although Europe contributed almost 15% to Cummins' total revenue last year, any worsening of the crisis in the region could dent Cummins' demand and revenue. Cummins feels demand from the region could slip this year.


  • Pick-up in the truck market. The North American truck market is showing signs of recovery and Cummins has a great chance of revving up revenue as it derives more than 50% of its engine sales from this market.
  • Tapping future fuel. Cummins also makes natural gas engines, which puts it in a very good position to cash in on the rising popularity of natural gas as a fuel. Recently, Navistar opted for Cummins' Westport engines to power its new trucks. More deals of a similar nature can take Cummins into newer and bigger markets.
  • Overseas growth. According to an International Energy Agency report, leading natural gas vehicle markets of Latin America and the Asia Pacific are likely to remain robust. Again, this means Cummins has a lot to look forward to.  


  • Global slowdown. China and India are important markets for Cummins. Worries about a slowdown in China are already thick in the air, and India is grappling with issues like high inflation. Demand from both these nations slipped in the fourth quarter, particularly for its power generation division. Cummins' revenue could get hit if the two markets slow down.

The Foolish bottom line
The pros clearly outweigh the cons in Cummins' case. It's a fundamentally solid company that keeps rewarding shareholders with good returns. Riding out macrochallenges shouldn't be tough for it.

I am not the only one who thinks so, as Cummins has bagged the coveted five-star ranking from our Motley Fool CAPS community. Keep tracking the company by adding it to your stock watchlist, our free and personalized stock-tracking service.

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