1 Must-Watch Stock for 2013

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cyclical stocks are bound to be choppy, and Cummins (NYSE: CMI) is a great example. The stock is 15% off from its 52-week high despite regaining 31% from the low it touched during the month of July. After a year that left much to be desired, many are wondering whether Cummins will be able to silence critics in 2013. A lot of things tell me: This one must be on your radar next year.

The Macro Game

Cummins wasn’t the only one to be hit by cyclical downturns. Those who invested in Caterpillar (NYSE: CAT) at the beginning of the year see red ink all over, and Navistar (NYSE: NAV) was a complete disaster, thanks to management’s unsuccessful initiatives. Only PACCAR (NASDAQ: PCAR) is returning more than 15%, and Cummins must be happy for that – After all Paccar is its oldest and largest customer.

Yet, Cummins outperformed peers year-to-date despite the headwinds, which speaks volumes of its fundamental strength.

<img src="http://media.ycharts.com/charts/34a6da63c0996c6e7d130a83218080c2.png" />

CMI data by YCharts

Then why did Cummins’ top line slip so sharply over the past one year? Blame global markets. Cummins gets nearly 60% of revenue from markets outside the U.S., and that includes China which went into deep sleep mode this year. India and Brazil weren’t too active either. The other 40% didn’t come easily either this year as the North American truck market hit a low not seen before.

<img src="http://media.ycharts.com/charts/19362af8600c63513df9e04cf199cb48.png" />

CMI Revenue TTM data by YCharts

Does that mean Cummins will have a tough ride in 2013? Can’t rule that out, but things might just turn around before you realize, and Cummins is best poised to take advantage for several reasons.

There’s promise

One, Cummins dominates more than 40% of the North American truck engine (heavy) market, and it even added Navistar to its customers list this year. Not to forget that Navistar’s own woes could easily mean more customers for Cummins as the former spends 2013 trying to get back to life.

Only China might be troublesome as demand for new trucks remain sluggish, but efforts are underway to get the economy back on growth track. Brazil isn’t that big a worry, and India could be a game-changer particularly because of Cummins’ long-standing tie-in with the nation’s largest automaker Tata Motors. In fact, sensing huge potential in the market, Daimler entered India this year with three heavy-duty trucks, and plans to launch another 14 over the next year and a half. Tata too launched six new ‘first-of-its-kind’ heavy trucks this September, four of which are powered by Cummins’ engines. Two of these are already part of the ‘largest-ever single order’ that Tata bagged in the same month.

With Navistar selling off its entire stake in its joint venture with India-based vehicle maker Mahindra & Mahindra in a recent move, Cummins can target a bigger share of the pie. By the way, don’t read much into Navistar’s move: the Indian truck market has great potential. It’s just that Navistar has too many problems to deal with, and has to get its act together in the domestic market before it can think beyond.

Gas, Gas, and More Gas!

The real opportunity for Cummins in 2013 and beyond, however, lies in the headway it has in the natural-gas engine market through its partnership with Westport Innovations (NASDAQ: WPRT). 2012 gave investors enough instances to get skeptical about the partnership -- say, when Cummins announced its own 15-liter natural gas engines earlier in the year or when Westport struck an exclusive partnership with Caterpillar to build engines for locomotives and mining trucks.

But I don’t see the alliance breaking down because the combination of Cummins’ expertise and Westport’s technology is giving both companies huge business. Westport, in particular, gets more than 50% of its revenue from this partnership and can credit it for most of its profits as well. Obama’s re-election further raises hopes as fuel-efficiency standards the President laid out some months back should only gather steam, which in turn would mean bigger roles for alternative fuel like gas.

Companies like Clean Energy Fuels have already started dotting the nation with the much-needed gas fueling stations along major highways – 70 came up this year and another 70 to 80 stations are lined up for 2013. Meanwhile, big industry names are clearly getting excited about nat-gas engines. Ford is the latest example, extending its line of trucks that would be powered by Westport’s WiNG System. 2013 should see many more orders falling on Westport’s and Cummins’ laps.

Watch Out!

Obama is serious about weaning America off foreign oil, and imports are already on the downtrend. According to EIA, the ten-month average for petroleum imports for this year is down by 800,000 and 1,162,000 barrels per day, respectively, compared to same periods in 2011 and 2010.

Given the huge opportunity called natural gas, Cummins is trading pretty cheap at a P/E of around 11. And surprise, surprise…the company is also more shareholder friendly than Caterpillar, despite the latter offering a better dividend yield, 2.3% currently. Two reasons: a fresh $1 billion buyback program within months of completing a similar one and 25% increase in dividends, both announced recently. The latter has also brought Cummins’ dividend yield at par with Paccar’s 1.8% yield.

I really don’t think such heavy discounting in Cummins shares is warranted. Even analysts see a lot of promise in Cummins next year – they have a 7.2% growth estimate for the company, which would be a massive upside from this year’s negative 6.9% clip. There's every reason to keep a close watch on the company that bagged the No.1 spot among industrial companies in 2012 Green rankings by Newsweek. Click here to add Cummins to your stock watchlist.

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins, Paccar, and Westport Innovations. Motley Fool newsletter services recommend Cummins, Paccar, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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