Cummins Inc. Equity Valuation and Analysis

The operating expense ratio compares selling, general, and administrative
expenses to sales, reflecting the efficiency of a firm’s operating structure.
Cummins efficiently utilizes operating expenses as a part of sales relative to
Caterpillar. Cummins has been effectively reducing their margin from 15.48% in
2002 to 12.93% in 2006, a 19% improvement for the entire period and an
average yearly reduction of 4.3%, compared to Caterpillar’s average reduction of
only 1.76%. It should also be noted that SG&A expenses only rose at a rate of
12.43% from 2004 to 2006, while net sales increased at a rate of 22% for the
same period. Cummins is an industry leader in controlling operating expenses,
operating 4% more efficiently than Caterpillar’s operating expense ratio of
16.97%. We believe this to be a great competitive advantage for Cummins as it
can generate more sales without a large increase in SG&A, producing wider,
more profitable margins than the industry standards.
- 51 -