Global power giant Cummins (NYSE:CMI) certainly appears to be coming out of the economic recession with all engines blazing. In the second quarter of 2010, Cummins reported its highest quarterly earnings as a%age of sales in more than 25 years. Operating income improved dramatically across the board. For the first time ever, all four of the company's segments posted quarterly EBIT in excess of 10% of sales.
Sales of $3.21 billion were 32% higher than $2.43 billion in the same quarter of last year. Net income in the second quarter was up more than four-fold to $246 million, or $1.25 a share, compared to $56 million, or 28 cents a share, in the same period a year ago. (Learn more about surprising earning results, see Surprising Earnings Results.)
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The Benefit of a Downturn
Cummins business segments design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations.
While Cummins' 2010 second-quarter numbers are being compared to depressed 2009 results, the sheer magnitude of the operational improvement demonstrates the value of a company that has the strength and size to grow its business during crumbling economic conditions. In the end, the company finds itself in an even better position to weather any future economic setbacks. For the remainder of 2010, Cummins announced that EBIT would come in higher than previously estimated at over 12% of sales.
Size has it's Advantages
Mr. Market has not taken a blind eye to the advantages that such size and global reach offer during this current economic environment. Cummins today trades for nearly 30-times earnings. The same goes for another dominant global franchise company, Deere (NYSE:DE). Through the recession, Deere has been able to weather the storm relatively well and come out a more dominant company in its industry. Like Cummins, once Deere sells a product it continues to earn revenues from it service centers on that equipment. Like Cummins, Deere also fetches near 30-times current earnings.
In fact, the best of the best industrials today have seen a surge in popularity from investors. Caterpillar (NYSE:CAT), a global construction giant often viewed as an excellent proxy for the overall health of the economy, trades for 35-times earnings. To be sure, these current valuations may look artificially high if the economy continues to improve and these businesses really start firing on all cylinders. If that happens, then names like Bucyrus (Nasdaq:BUCY) at 16-times current earnings, or Terex (NYSE:TEX), at under nine-times current earnings, may appeal to the more value conscious investor.
The Bottom Line
The strong results coming out of names like Cummins and other industrial giants are a sign that these types of businesses are the ones that will lead the economy back to growth.
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