Generator Sales Boost Cummins Shares

Strong demand for diesel generators has helped make Cummins Inc. (CMI) one of the hot stocks of 2007. Shares of Cummins closed at an all-time high of $117.64 Monday, up 159% on the year to date. Investor enthusiasm was boosted by an upgrade Friday from Bear Stearns analyst Pete Nesvold, who predicted that new emissions standards for diesel engines will help Cummins gain market share.

With its core market of truck sales lagging, Cummins has benefited from record sales of generators, supported by strong demand from the data center sector. Sales in Cummins' power generation unit were $675 million in the first quarter of 2007, up 26 percent from the same period in 2006. Commercial generator sales rose 27 percent and alternator sales increased 43 percent, as both markets showed strength in almost all geographic areas. "The business saw a significant increase in demand for its commercial generator sets and alternators around the world - most notably in North America, India and the Middle East," the company said in its quarterly report to the SEC.

The data center building boom has created backlogs for the large generators that provide emergency backup power, with some facility operators reporting lengthy delays on new units of the most popular 2 megawatt models.

Those delays, along with price hikes by major manufacturers, have made generator management a major issue for data center companies building new facilities. Cummins raised its generator prices by 10 percent last fall, citing the rising price of raw materials. But market demand is a factor in the price hikes, as demonstrated by Cummin's first quarter earnings, in which it reported "strong margin improvements in the Power Generation segment."

Nesvold, the Bear Stearns analyst, believes more price hikes lie ahead for Cummins products. Last Friday Nesvold predicted the stock would rise 22.1 percent, to a price of $130, by the end of 2008. The new emissions rules are going to hurt Cummins' competitors over the coming years, he said, but the Columbus, Ind., company is set to benefit from the changes.

"This creates opportunities for Cummins to simultaneously increase content and raise prices," he said. "Moreover, it creates material market share opportunities for Cummins, as weak competitors either cannot afford or don't have the technology to meet the new standards."

Cummins is also positioned to benefit from its early commitment to China, one of the strongest markets for diesel engines. Cummins says it is the largest foreign investor in the China diesel engine industry. Cummins' ties to the country date back to 1975 when then-CEO J. Irwin Miller led a Cummins delegation to Beijing, making him one of the first American business leaders to seek opportunities in China. Cummins began licensing its engine technology in China in 1981 and formed its first joint venture in the country in 1995. Today, Cummins operates more than 20 facilities in China with more than 5,400 staff and 13 manufacturing plants.