Cummins (CMI) is a cyclical that’s good at being a cyclical.
Which is why I’ll be adding the stock to my JubakPicks Dividend Portfolio tomorrow. The shares closed today, October 12, at $111.98, down from the top of its 52-week range at $151 (and not too far off the 52-week low at $103.) At today’s closing price, the shares pay a dividend of 3.5%.
Profiting by riding the cycle in any sector isn’t nearly as easy as it might sound and I can think of only a handful of cyclical companies that understands how to profit from riding the ups and downs of the economy in its market.
In bad times, and, more importantly, in good times Cummins works hard to take costs out of its business. Facing a 50% drop in demand, largely from its mining and infrastructure units, Cummins has implemented a program to take down its break-even costs. Nothing too special there—that’s what all cyclical companies do when demand falls at the bottom of the cycle. Cummins, however, has worked just as hard at taking costs out of the company at the top of the cycle. One result, Morningstar notes, is that Paccar, which introduced its own heavy-duty truck engine to compete with Cummins four years ago, still makes the same profit on a truck whether it uses one of its own engines or buys one from Cummins. It’s hard to pick up market share against Cummins with that kind of economics.
And in good times, and, more importantly, in bad times Cummins continues to spend on research and development so that it’s technology seems always one step ahead of competitors. Cummins is already the largest manufacturer of natural gas and hybrid bus engines in the United States. On October 5, the company’s new ISL G Near Zero natural gas engine for the medium-duty truck and bus market got Near Zero NOx emission certification from the U.S. Environmental Protection Agency. (Cummins has partnered with Westport Innovation on the engine.) That engine’s ability to meet strict emissions standards in the United States and the EuroZone will enable Cummins to grow market share in those regions, and that engine should also help drive market share gains in India and China on anticipated emissions-reduction standards in those markets.
Cummins has been on something of a dividend growth jag recently. Dividends have gone from $1.80 a share in 2012 to $2.25 in 2013 to $2.81 in 2014 to $3.51 in 2015. Operating cash flow looks sufficient to keep the dividend growing.
Besides the dividend, I think the stock should record solid capital gains as end markets in stress sectors recover (at least somewhat) in 2016. A 12-month target price of $134 a share seems reasonable.
The company next reports earnings on October 27.