After a hefty run-up for months, the recent weakness in the Dow Jones Industrials has left investors wondering whether a sharp pullback is on its way. How long the bull market will last is anyone's guess, but there's one stock that's not only holding up strong but also looks poised to hit a new high anytime soon.
I'm talking about Cummins (CMI 5.29%). While the engine maker's last quarterly numbers weren't the kind to get investors excited, they did leave the Street impressed. But those numbers have little to do with what I have to tell you about Cummins today.
Cummins rules the roost
One critical reason Cummins excites me is that its engines dominate the North American truck market. Better yet, Cummins is gaining market share rapidly, thanks largely to the failure of rival Navistar International's (NAV) emissions technology in 2012.
Navistar's sales plunged even as its warranty claims hit a new high last year, after its technology failed to get the U.S. Environmental Protection Agency's clearance. To save the company, and with no other option left, Navistar's management decided to get Cummins' tried-and-tested engines back into its International brand trucks. The decision paid off, because over the past seven months, Navistar has already bagged more than 10,000 orders for trucks fitted with Cummins' ISX15 engines.
With Navistar back as its customer and with a strong response to its heavy-duty ISX15 engines launched last year, Cummins is targeting 40% market share in the North American heavy-duty truck market for 2013. While that's a 1-percentage-point improvement over last year, Cummins might end up doing even better, especially as it ramps up production of its much-anticipated 12-liter engines.
Ready for the next big thing?
After the successful launch of the ISX 15-liter engine, ISX12G is the next big product from Cummins' house to have caught the market's attention. Several companies, including Eaton, Freightliner, and PACCAR (PCAR 4.69%), have already lined up to take delivery of the 12-liter engines that are built using Westport Innovations' (WPRT -0.72%) proprietary natural gas technology.
In fact, Westport, which has a long-standing relationship with Cummins, expects the ISX12G to be "the strongest product that CWI has ever launched." CWI, the Cummins-Westport joint venture, recently reported a record second quarter, with a 38% jump in engine shipments, year over year, backed by strong demand for the newly launched ISX12G engines from North American trucking customers.
Leading the way
For Cummins investors, these two engines mean excellent opportunities and, hence, great growth prospects for the company in the near future. More importantly, they are likely to ensure that Cummins remains at the forefront in the heavy-duty truck market.
The best part, though, is that Cummins' leadership isn't restricted to the heavy-duty segment alone. The engine maker enjoys an even bigger slice of the medium-duty truck market in North America. Following an 18% climb in year-over-year engine shipments to the segment in the last quarter, Cummins now expects to end the year with a handsome 60% share in the medium-duty truck market. That's a sizable 8-percentage-point improvement over last year's share, and a mind-boggling 22 percentage points gain in just five years' time.
These relationships are here to stay
Clearly, Cummins' engines are the most sought-after among truck makers in North America. Some investors have been wary that new and similar products from peers could put the brakes on Cummins' growth run. I'm not too worried, though, because ironically, those very companies that are experimenting with their own engines, such as Navistar and PACCAR, still rely heavily on Cummins' products, thereby proving Cummins' indisputable expertise and leadership in the field.
PACCAR, for instance, ranks as Cummins' largest customer, having accounted for 13% of its total sales in 2012. More importantly, PACCAR's contribution to Cummins' top line has nearly doubled in as many years. Likewise, nearly 28% of Westport's revenue during the first half of the year came from CWI. The venture generated 34% gross margin during the period -- the highest among Westport's business segments.
Having Cummins as a partner or a supplier is a huge advantage for these companies, since Cummins' solid brand name, proven quality standards, and years of experience are unparalleled. So it's unlikely that any of these companies will want to sever ties with Cummins even if they want to make their mark in the industry with their own products.
Foot on the gas
Even if rivals make their own engines, there's plenty of room for them in the market. With leading automakers driving full speed into the trucking segment, demand for engines should only rise. More importantly, natural gas, as an alternative fuel, is getting more popular by the day.
The latest, and probably the best, example is Ford's (F 2.31%) recent move to offer natural-gas engines for its next-generation F-150 pickup. Its F-series is so popular that Ford is even accelerating production to meet the rising demand. Cummins stands to benefit tremendously as more and more truck fleets opt for natural-gas engines.
It's famous, the world over
What's more, Cummins' growth story doesn't end with the North American market. Its revenue from Brazil and China climbed 22% and 8%, respectively, year over year, during the last quarter.
I think Cummins will do really well if it pays attention to the Chinese market in particular. As the largest market for heavy-duty trucks in the world, China offers significant growth opportunities. Again, Ford could set an example for Cummins. After making a splash with its cars in the Middle Kingdom, Ford is now eyeing the trucking market, which explains its acquisition of China-based Taiyuan Changan Heavy Truck Company last year. With Ford's trucks, companies such as Westport and Cummins also stand a chance to drive into the high-potential market.
At present, India is the only international market experiencing a slowdown. But with 40% market share in India already under its belt, Cummins will be the biggest beneficiary once the Indian trucking market recovers.
The real gain for investors
Cummins' competitive advantage and growth story look compelling, but there's another great reason investors should give the stock a serious thought: Cummins recently increased its dividend by 25%. With that, Cummins' dividend has grown 237% in the past four years, and the stock is yielding a decent 2% at current prices. That apart, Cummins is also running a $1 billion share-buyback program to maximize shareholder value. I think Cummins' stock makes a superb buy, even if it's less than 5% away from its 52-week high.