Published: June 23, 2010

Nestled in the heartland of America, Cummins Inc. (NYSE: CMI) is an icon of American manufacturing done right. And now that it's being powered by new technology, emerging markets growth and new regulatory standards, the company is ready to book serious profits.

Founded almost 100 years ago and publicly traded since 1957, Cummins dominates the diesel truck engine market in the United States and is strongly increasing its international presence.

The high quality, efficiency and durability of the engines Cummins designs and builds are the foundation of the company's leadership. And its strong and disciplined cost controls, inventory, and receivable management are vastly superior to that of its competition.

Those attributes translate into higher profitability and cash generation, and in turn, allow for a light debt burden, high liquidity and a bulletproof balance sheet.

Cummins' superior quality and cost advantage are what's made it the leading designer and manufacturer of diesel engines in the United States. It's also quickly become the largest producer of natural gas and hybrid bus engines in the country. And both segments are due for very strong increases in sales.

Cummins was the first to comply with a very tough new environmental standard in 2007, and in 2008, it pushed Caterpillar Inc. (NYSE: CAT) out of the on-highway heavy engines business. Daimler AG (OTC: DDAIF) also ceased sourcing engines internally and switched to Cummins.

The company already is consistently beating sales and earnings estimates, and it's showing no signs of slowing down. Cummins' first-quarter net income more than doubled Wall Street estimates, rising to $149 million, or 75 cents a share, from $7 million, or 4 cents, in the year-earlier quarter. And we can expect a similar outperformance as we approach its second-quarter earnings report, to be released on July 27.

This is not only because the company boasts disciplined and consistent management, but also because U.S. and global trends are providing a unique profit opportunity.

While Asia and Latin America - most notably Brazil - are now being forced to curtail economic growth to keep from spurring inflation, the U.S. recovery continues to gain momentum. And, very importantly, infrastructure spending remains a strong pillar of global growth.

As a result, there currently is very high demand for new trucks all over the globe. That's why Cummins' international sales have grown to 60% of total sales from 40% just a couple of years ago. Who says that America cannot compete in manufacturing around the world?

In the United States, the trucking industry has been caught with an antiquated fleet that is in desperate need of replacement. The average age of the U.S. truck fleet is the oldest it has been in decades, and old trucks mean higher maintenance costs. As the U.S. recovery gathers steam, trucking companies are increasingly taking advantage of low interest rates to replace their trucks and reduce operating expenses. And the federal government has ambitious plans to increase mileage standards for big rigs, which will help accelerate the replacement of old trucks.

In addition, higher gasoline prices have accelerated the migration to diesel engines. Cities, states and federal governments are moving towards more efficient vehicles and thus increasing their purchases of natural gas and hybrid engines. The United States is riddled with large pockets of natural gas and prices are very low right now, which makes shifting to natural gas-powered bus fleets a no-brainer.

Cummins is perfectly positioned to take advantage of this with new, undisclosed designs aimed at reducing pollution and boosting mileage. It might not be as sexy as Apple Inc.'s (NYSE: AAPL) iPhone, but it's much more difficult to leapfrog Cummins' products and the profits it's generating will soon be just as good.

This trend is increasingly dominant in Europe and Asia as well, as countries around the world tighten emissions and mileage standards further.

Cummins should continue to grow strongly in its power-generation business, because its products enjoy advantages in standby, mobile and distributed power generation. The inadequacies of the electricity-distribution grids in many emerging markets will provide fuel for strong future growth in this category.

So, continued emerging market growth, an ingrained recovery in the United States, and tighter mileage and pollution standards will continue to power unusually strong profits for Cummins over the immediate-long-term future.

Cummins stock is still discounting strong growth, but it's trading at all time highs and testing a strong resistance. And if the company's second-quarter earnings blow through analysts' estimates the way first quarter earnings did, its stock could go substantially higher. So we need to enter the stock in a staggered fashion.

We need to buy some now and buy some more after the earnings report, whichever way it goes. A solid strategy is to use dollar-cost averaging, which means buying the same dollar amount of the stock in periodic purchases over time. This way, when the stock rallies we get fewer shares, and when the stock is cheap we get more.

-- Horacio Marquez
Associate Editor
Money Morning

Note: This article originally appeared on Money Morning