Revving up the recovery's engines

Businesses are buying new trucks and construction equipment, which is where Cummins shines.

By Jim J. Jubak Sep 27, 2010 3:01PM

Jim JubakAt this point in the economic recovery, I'd much, much rather own capital-equipment stocks than consumer stocks.  

As I noted in my post on Friday, corporate customers are buying capital goods to expand and upgrade their businesses, while consumers are still keeping their wallets shut tight (see my post). 

A case in point is Cummins (CMI), a maker of diesel engines. After a slow first half to 2010, the company's sales are showing solid increases that look as if they will extend well into 2011. 

There's no real magic here. In the Great Recession, sales of trucks and construction equipment dried up, and that crushed Cummins' sales of diesel engines. Revenue plummeted to $10.8 billion in 2009 from $14.3 billion in 2008. 

But trucks continued to get older and wear out. The sales of 2009 weren't actually lost, but were just postponed. And now that times look a little better and corporate profits are riding at high levels, truck buyers are playing catch-up big time. 

How big? In August, orders for Class 5-8 trucks leaped 21% from August 2009 and 22% from July 2010. The order backlog grew 3% from July. Post continues after video:

And this isn't enough to dent the historically old age of the truck fleet. Wells Fargo tracks the ratio of Class 8, the biggest trucks, sold in the last four years to the number sold in the last seven years as a way to chart the age of the truck fleet. (More sales in the last four years and the fleet is getting younger; fewer sales, and it's aging.) 

The current ratio of just 47% is the lowest in the last 15 years. The truck fleet is really, really old, and there's a lot of pent-up demand. 

But that's not all Cummins has going for it. The Environmental Protection Agency is phasing in new rules on diesel emissions that will require truck and construction-equipment operators to upgrade their equipment.  

Here's where Cummins large investment in new technology pays off: The company has been consistently among the first in its industry to get new engines certified by the EPA to market. So, for example, last week Cummins began production of the first EPA-certified engines for off-highway equipment.  

Shares of Cummins aren't cheap anymore. The stock is up 117% in the last year. But given the earnings power over the next year, it's not yet especially expensive, either. Standard & Poor's projects 2011 operating earnings per share will climb by 23% in 2011 to $6.53. 

At around $90, the stock now trades at 16x S&P's estimate of 2010 earnings.  

I think that the multiple on the stock will move further toward the top of Cummins' five-year range of 4.3x to 19.4x. (And I'm a little more optimistic on 2011 earnings than S&P is.) 

My target price for the stock is $114 by July 2011. 

At the time of this posting, Jim Jubak don't own shares of any stock mentioned in this post in his personal portfolio. 


Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120 rated 1
268 rated 2
439 rated 3
709 rated 4
641 rated 5
609 rated 6
640 rated 7
516 rated 8
272 rated 9
152 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.