The market may be hitting record highs this year, but Cummins (NYSE:CMI) investors didn't get a chance to celebrate yet. After gaining nearly 32% in 2013, the stock has been surprisingly flattish this year.

Source: Cummins.

Interestingly, there has been no major setback to Cummins' business in recent months, nor have the company's development plans hit a hurdle. In fact, Cummins is a lot more optimistic about its business conditions today than it was at the start of the year. So what's holding its shares back?

What's irking Mr. Market?

Cummins' operational performance so far this year leaves no room for complaints. The company raised its 2014 revenue guidance in each of the past two quarters, encouraged by 9% growth in its top line during the first half of the year. Cummins now sees its full-year revenue growing between 8% and 11% versus its earlier projection of 4% to 8% growth.

Perhaps investors haven't taken too kindly to Cummins' cautious margin outlook. Despite the upward revisions in revenue, the company left its operating margin guidance unchanged at 12.75% to 13.25% for the year, which is only marginally better than its 2013 EBIT margin of 12.5%.

That may sound uninspiring, but I'm not too worried. Going by the ongoing strength in Cummins' key end market, trucking, it looks like the company is only being conservative, and that there's a fair chance that it will end the year on a brighter note. Delving deeper into the company's financials, you'll realize that power generation is its only business that's showing some signs of weakness. Take a look at the table below, which shows Cummins' 2014 projections for each of its segments.




Power Generation


Consolidated revenue growth

Up 6%-8%

Up 12%-17%

Down 3%-Up 3%

Up 30%-35%

EBIT margins (% of revenue)





Source: Cummins' Q2 earnings presentation. 

Nevertheless, a weak power generation business shouldn't hurt Cummins much since it contributes less than 15% to the company's total revenue. Moreover, even a slight uptick in demand from key international markets like China and India could boost sales from the division. Meanwhile, the company's primary businesses -- engines and components -- should find easy avenues to grow, thanks primarily to the ongoing strength in the trucking industry. 

What's working in Cummins' favor?

Trucks make up more than 60% of Cummins' engine sales, and nearly 46% of the company's components products, such as emission solutions, filtration, and fuel systems, go into its own engines. The North American trucking market is on a roll this year, thanks to record freight tonnage and strong replacement demand. For perspective, Cummins' key customer, PACCAR (NASDAQ:PCAR), expects its Q3 truck deliveries to improve 5% sequentially following 6% sequential growth in its second-quarter deliveries. PACCAR is even scaling up production to meet increased demand.

Cummins-Peterbilt SuperTruck. Peterbilt is a PACCAR brand. Source: Cummins.

Cummins is exploiting the opportunities well -- It expects to own 73% share of the North American medium-duty truck market by the end of this year. That's an astounding 10% improvement over 2013.

What's more, Cummins is successfully converting its incremental sales into profits -- it earned 13% higher net profit through the first six months of the year. And the company has a clear objective in mind: Even in a low-growth scenario, it expects to hit $25 billion in revenue and 16% in operating margin by 2018. For perspective, Cummins generated $17.3 billion in revenue and 12.5% EBIT margin last year.

Why Cummins' stock should pick up from here

Long story short, Cummins' operational performance doesn't warrant weakness in its share price. Perhaps its numbers didn't meet Street expectations, but you know better than to read too much into analysts' estimates. As a company that dominates the global diesel engine market and is making headway in the natural-gas market, Cummins remains a compelling growth story, especially as global emission standards get stricter.

But perhaps the biggest reason to get bullish about Cummins is its close connection with the industry that nearly runs the American economy: trucking. As long as Cummins remains a key supplier to trucking companies, it should continue to grow. And there's no reason that growth story shouldn't reflect in Cummins' share price going forward.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Cummins and Paccar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.