Sunday, September 23, 2007

Stock to Watch: Cummins (CMI) Hitting on all Cylinders

Oh I couldn't resist that catchy headline (pun intended!).

I only have so much time in a day, and with my crack staff of 1 I can only investigate so many names. One name I have been hearing a lot (for example Cramer is a big fan) is Cummins (CMI), but I never took the time to really sit down and analyze it - engines? boring! However it's been on my long range watch list - so I decided to look at it in depth this weekend. What does Cummins do?

From Yahoo Finance profile: Cummins, Inc. engages in the design, manufacture, distribution, and servicing of diesel and natural gas engines, electric power generation systems, and engine-related component products worldwide.
  • Its Engine segment manufactures and markets a range of diesel and natural gas-powered engines for heavy-and medium-duty truck, bus, recreational vehicle (RVs), light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail, and governmental equipment markets. It also provides new parts and service, and remanufactured parts and engines.
  • The company's Power Generation segment provides power generation systems, components, and services, including diesel and alternative-fuel electrical generators for office buildings, hospitals, factories, municipalities, utilities, universities, RVs, boats, and homes. It also offers engines, controls, alternators, transfer switches, and switchgears, as well as provides an alternative source of generating capacity.
  • Its Components segment produces filters, silencers, and intake and exhaust systems for on-and off-highway heavy-duty equipment. It also offers air, coolant, fuel and hydraulic filters, antifreeze and coolant additives, catalysts, particulate filters, controllers, and other filtration systems, as well as turbochargers for diesel engine applications.
  • Cummins' Distribution segment provides parts and service, and service solutions, including maintenance contracts, engineering services, and integrated products.
Whew, sounds like a snore! But do you know this is a play on China and India? The stock started 2007 at $60. Today? $130. That's 116% gain for this boring company. If only all our stocks were so boring.

From Cummins last earnings report on July 26th:
  • COLUMBUS, IND.--(BUSINESS WIRE)--Broad gains across most of the Company's product and geographical markets led Cummins Inc. (NYSE:CMI) to record revenues and strong earnings in the second quarter.
  • The Company today reported second-quarter revenues of $3.34 billion, up 18 percent from $2.84 billion in the second quarter of 2006 and 10 percent higher than the previous quarterly record set in the fourth quarter of last year.
  • Absent the tax benefit a year ago, net income increased 11 percent over the same period in 2006.
  • The Company's strong performance comes in the face of the emissions-related slowdown in the North American heavy-duty truck market, which is expected to be down 45 percent this year. Cummins' North American heavy-duty engine shipments fell 42 percent from a year ago, but significant growth in the Company's non-heavy duty truck engine markets and other product lines more than offset that decrease.
  • Based on its first-half performance and its outlook for the remainder of the year, Cummins also raised its 2007 earnings guidance today to $7.15 - $7.65 from $6.00 - $6.50 a share.
  • The Company's Engine, Power Generation and Components businesses all reported record revenues in the second quarter, while Power Generation, Components and Distribution reported record Segment EBIT.
  • The Company's share of the North American heavy-duty market continued to increase in the second quarter. Through May, Cummins had earned a 33.1 percent share of the market - up from 27.1 percent at the end of 2006.
  • The Company's Power Generation business continues to produce record sales and earnings, led by significant growth in the Company's commercial generator set and alternator product lines. Growth was strongest in North America, the Middle East and India.
  • The Company's Distribution business reported record profit and near-record sales during the quarter. Demand for power generation equipment increased significantly in North America, Europe and the Middle East.
Pretty much all you can ask for in an industrial name. Record revenues; strength overseas; raising guidance, etc. I've been looking at other ways to get to those record revenues in the Middle East - ways to take advantage of the massive revenue gains made from crude at double the price it was just a few years ago - the scope of companies is very limited. But here is one.

Cummins has a nice Powerpoint presentation (click to check it out) on their website discussing their firms past, current, and future done on September 18, 2007. Most interesting to me were slides 60 and forward. Presentations on join ventures in China, presentations on joint ventures in India (with Tata no less which is the General Electric (GE) of India), etc.

The company has about $700 million in sales in China now, projecting to more than double by 2011. India? I think they just cut and paste the same Powerpoint slides over from the China section of the presentation and copied the word "India" over "China". And these are not recent initiatives - the company has been on the ground in these countries for many years, laying a framework.

In 1999, 40% of Cummins' sales were foreign, 60% US. Now? 50/50. By 2011, foreign sales will be greater than domestic. It pays dividends... it buys back stock... and yes it's an old 'smokestack' type of business, but old is new again.

Let's look at current valuations. Unfortunately (for those left out) the stock just jumped from $120 to $140 in the day and half after Ben blessed us all to speculate again. 16% that quick? Not bad for a boring non tech name! Now its trailed back down to near $130. After a huge rise from $60 to $120 in January - early July 2007, the stock has been range bound digesting this massive 100% gain for 2 full months. A nice base has been built and the stock could be ready to move again; personally I'd like to begin a position in this name but hope for a bit more of a pullback - maybe low to mid $120s.

Let's look at Cummins' valuation - analysts are targeting $7.70 EPS for 2007 - this is at the high end of recently confirmed EPS guidance by the company of $7.15-$7.65. Next year? Almost $9.00. Both these numbers are up tremendously from before the last earnings report when analysts were figuring $6.45 for 2007 and $7.55 for 2008 - yet the stock price has been stagnant. Which shows you once again how the stock 'price' tells you way ahead of the 'fundamentals' changing (the huge rise in stock price in 1st half 2007). So for a company growing 15-20% (with international operations growing in excess of 30%), how is the value? Well it is not cheap, but not 'overly expensive'. At $130 we are looking at 17x 2007 estimates and 14.5 2008 estimates.

The chart also looks very solid (see below)

So here we have the perfect stock to play the environment for the next 18-24 months; slowing US consumer driven economy - worldwide growth in Mid and Far East regions. While no current position, I will be starting a smallish position Monday and then looking to add on a pullback of about 5-7% if possible.


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