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Cummins Inc. (CMI), Honeywell International Inc. (HON), Illinois Tool Works Inc. (ITW): A Quick Look at the Diversified Machinery Sector

I am always on the look out for cheap and under valued stocks, and a company that recently attracted my attention was global engine manufacturer Cummins Inc. (NYSE:CMI)

Cummins Inc.Producer of diesel engines and related parts, Cummins Inc. (NYSE:CMI) has fallen out of favor with investors recently after the company reported worse than expected results for the first quarter of this year. However, after this sell-off, I believe that the company is currently undervalued.

Here is a quick comparison of Cummins Inc. (NYSE:CMI) against its closest competitors:

Company Trailing P/E Forward P/E EPS growth past 5 years Sales growth past 5 years
Honeywell International Inc.(NYSE:HON) 20 14 3.2% 1.7%
Illinois Tool Works Inc. (NYSE:ITW) 12.7 14.5 9.9% 2.2%
Cummins Inc. (NYSE:CMI) 14.8 11.8 18.6% 5.9%
Sector Average 21.9 12.6 0.14% 2.5%

The sector average figure is the average of the ratio’s of the ten largest diversified machinery companies in the world.

Cummins Inc. (NYSE:CMI) is the smallest company out of its three competitors. Currently, with a market cap of just under $22 billion, Cummins is around a third the size of Honeywell International Inc.(NYSE:HON), which has a market cap of $61 billion.

Illinois has a valuation of $31 billion currently. Despite its relatively small size, Cummins Inc. (NYSE:CMI) is dominant in the market for engine components.

The recent weakness in Cummins’ earnings and the reason for its recent sell-off appears to be that the company’s customers were putting off orders due to the uncertainty surrounding regulation on emissions standards. However, Cummins is well placed for any change in emission standards as the company already has a wide portfolio of high-tech, low emission engines.

Moreover, out of its closest peers, Cummins appears to be growing the fastest, expanding EPS nearly 19% during the past five years, despite the economic slowdown. Cummins’ peers, Honeywell International Inc.(NYSE:HON) and Illinois, have only managed to grow EPS 3% and 10%, respectively.

Geographical split

Diversified machinery companies are, by their very nature, extremely exposed to the fragile nature of the economic climate. So, with the U.S. economy powering ahead, China slowing, and Europe sinking, it would be helpful to know where each one of these companies generate the majority of their revenue from and how susceptible each company will be to the economic climate in its biggest market.

Illinois Tool Works Inc. (NYSE:ITW)

Region Revenue
(in $ Million)
Percentage of Total
Asia/Far East 2,097 11.70%
Australasia 864 4.82%
Europe 5,090 28.40%
North America 1,222 6.82%
Rest of the World 937 5.23%
United States 7,714 43.04%
Total 17,924 100.00%

Illinois Tool Works Inc. (NYSE:ITW) makes most of its revenue from the U.S., which puts the company in prime position to benefit from the recovery that is gaining speed. However, more than a quarter of the firm’s revenue comes from Europe and this will probably be a drag on revenue growth. Although, 12% of Illinois’ revenue comes from the fast growing Far East, and this could offset some declines from Europe.

Profit Margin
Gross 38%
Net 16%

Illinois Tool Works Inc. (NYSE:ITW) generates a solid net profit margin of 16%, the widest margin out of the three peers in this piece.

Cummins Inc. (NYSE:CMI)

Region Revenue
(in $ Million)
Percentage of Total
United States 8,107 46.77%
Rest of the World 4,622 26.66%
China 1,056 6.09%
Brazil 798 4.60%
India 757 4.37%
Other 1,994 11.50%
Total 17,334 100.00%

Just under half of Cummins’ revenue is from the U.S. Meanwhile, 15% of revenue comes from the fast growing Chinese, Brazilian, and Indian markets, which really offers potential for growth.

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