These relationships are here to stay
Clearly, Cummins’ engines are the most sought-after among truck makers in North America. Some investors have been wary that new and similar products from peers could put the brakes on Cummins’ growth run. I’m not too worried, though, because ironically, those very companies that are experimenting with their own engines, such as Navistar International Corp (NYSE:NAV) and PACCAR Inc (NASDAQ:PCAR), still rely heavily on Cummins’ products, thereby proving Cummins’ indisputable expertise and leadership in the field.
PACCAR Inc (NASDAQ:PCAR), for instance, ranks as Cummins’ largest customer, having accounted for 13% of its total sales in 2012. More importantly, PACCAR Inc (NASDAQ:PCAR)’s contribution to Cummins’ top line has nearly doubled in as many years. Likewise, nearly 28% of Westport’s revenue during the first half of the year came from CWI. The venture generated 34% gross margin during the period — the highest among Westport’s business segments.
Having Cummins as a partner or a supplier is a huge advantage for these companies, since Cummins’ solid brand name, proven quality standards, and years of experience are unparalleled. So it’s unlikely that any of these companies will want to sever ties with Cummins even if they want to make their mark in the industry with their own products.
Foot on the gas
Even if rivals make their own engines, there’s plenty of room for them in the market. With leading automakers driving full speed into the trucking segment, demand for engines should only rise. More importantly, natural gas, as an alternative fuel, is getting more popular by the day.
Image source: Westport Innovations.
The latest, and probably the best, example is Ford Motor Company (NYSE:F)‘s recent move to offer natural-gas engines for its next-generation F-150 pickup. Its F-series is so popular that Ford Motor Company (NYSE:F) is even accelerating production to meet the rising demand. Cummins stands to benefit tremendously as more and more truck fleets opt for natural-gas engines.
It’s famous, the world over
What’s more, Cummins’ growth story doesn’t end with the North American market. Its revenue from Brazil and China climbed 22% and 8%, respectively, year over year, during the last quarter.
I think Cummins will do really well if it pays attention to the Chinese market in particular. As the largest market for heavy-duty trucks in the world, China offers significant growth opportunities. Again, Ford could set an example for Cummins. After making a splash with its cars in the Middle Kingdom, Ford is now eyeing the trucking market, which explains its acquisition of China-based Taiyuan Changan Heavy Truck Company last year. With Ford’s trucks, companies such as Westport and Cummins also stand a chance to drive into the high-potential market.
At present, India is the only international market experiencing a slowdown. But with 40% market share in India already under its belt, Cummins will be the biggest beneficiary once the Indian trucking market recovers.