How to Cash in on Booming Truck Sales: Engine Maker Cummins’ Inexpensive Stock
One way to ride the economic recovery is through companies exposed to the trucking industry. Strong demand to move goods from one point to another helped drive truck tonnage up at the highest rate in more than a decade last year.
Specifically, focus on the companies that make the trucks and engines and service the rigs -- not the haulers themselves (too pricey).
Demand for new trucks of all weight classes has been strong, particularly heavy-duty Class 8 rigs, as the recession kept a lid on new truck purchases and the trucking industry is now facing an older fleet in need of replacement and/or repairs.
Some expect sales of new Class 8 trucks in North America to rise about 20% in 2012 to upwards of 240,000 units, after gaining 56% last year.
Two companies that dominate that market are engine-maker Cummins (CMI) and truck giant Paccar (PCAR). And don't forget engine and off-highway truck maker Caterpillar (CAT), which has also benefited from growing demand from the mining and other resource-base sectors for its heavy-duty trucks. All have seen their stock price eclipse the S&P 500 so far this year.
They definitely have competitors, including Daimler Trucks, a private subsidiary of Daimler, which not only makes vehicles but also manufacturers the engines for them through its Detroit Diesel or Mercedes-Benz units.
Still, Cummins is among the cheaper ways to play the economic revival in trucking. For the fourth quarter, ended Dec. 31, profit jumped 51% helped by higher demand for engines in the trucking, construction, oil and gas markets in North America, and the global mining sector. The company said it enjoyed record full-year revenue in North America, Brazil, China and India.
Cummins provides nearly 40% of all heavy-duty engines in North America. Plus its components division, which provides parts to the aftermarket side of the business, has had growing operating profit over the past several years, representing 18% of earnings before interest and taxes in 2011, up from 13% in 2009. In 2011, earnings before interest and taxes in engines gained 71% and rose 69% in Cummins' component business.
Paccar had stronger fourth-quarter results, but from a valuation standpoint, Cummins’ PE is lower than many in the truck space, except for Navistar (NAV) which has had a number of warranty and cost problems that have muddied its financials.
Plus, Cummins' Cummins’ return on assets is tops.
Filed under: Company Analysis