By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 7/21/11
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A high-quality company with a low PEG ratio is
Cummins (CMI). With a PEG ratio of less than 1.00, it meets my value objective.
My calculation of CMI's PEG ratio of 0.84 is based upon the current stock price of 106.55, my forward 12-month earnings per share estimate of 7.70, and my estimated five-year earnings per share growth rate of 16.5%. Standard & Poor's Quality Ranking for CMI is B+, although I expect Standard & Poor's to boost CMI's Ranking to A- based on the company's strong balance sheet and steady earnings and dividend performance during the past 10 years.
Cummins (CMI) designs, manufactures, distributes and services engines of all types, plus electrical power generation systems. The engine division (49% of sales in 2010) manufactures and markets a broad range of diesel and natural gas-powered engines under the Cummins brand name for heavy- and medium-duty trucks, buses and recreational vehicles. Founded in 1919, the company has long-standing relationships with many truck makers, including Chrysler, Daimler, Volvo, PACCAR, Navistar, Komatsu, Ford and Volkswagen.
While sales in the U.S. have been weak, Cummins has taken advantage of strong demand abroad, especially in China, India and Brazil. Sales increased 66%, 31% and 39% respectively during the first quarter in those countries. Foreign sales account for 61% of total sales with more sales to China than any other country outside the U.S.
Demand for CMI's heavy truck engines in the U.S. is expected to rebound significantly during the next two years. Stricter emission standards around the world will increase demand for the company's clean-running engines, fuel systems and exhaust components.
Sales and earnings per share will likely increase 15% during the next 12 months, boosted by CMI's strong position in emerging markets. The dividend was recently increased and now provides a 1.5% yield. At 13.8 times our 12-month forward EPS estimate, Cummins is undervalued.
Editor's Note: You can read more about PEG Ratio analysis and get continuing coverage of Cummins in the Cabot Benjamin Graham Value Letter. There you'll not only find buy and sell advice for Cummins, you'll get 20 other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market's best undervalued stocks. And he will tell you exactly when to sell, too. Roy's recent sell recommendations netted his investors gains of 62%, 39%, 36% and 32% in just six months using the PEG ratio system. Remarkable! Don't miss out on his next recommendations ... click here now to get started today!
J. Royden Ward
Editor of
Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of
Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the
Value Letter.