2) A bullish article on Cummins Engine (CMI) in Kiplinger's: Can Cummins' Success Continue? (see my take on Cummins here)
- Based on most analysts' opinions, the shares of engine maker Cummins are running on fumes. The company has had a remarkable run, they'll concede, but the stock, which closed at $139.98 on October 9, is expensive.
- A recent Lehman Brothers report points out that Cummins' price-earnings ratio of 16 (it's now up to 18, based on the latest price and estimated 2007 earnings of $7.70 a share) is just wee bit higher than its historical peak P/E of six to seven.
- Of the 11 analysts who follow the Columbus, Ind., manufacturer, only three rate the stock (CMI) a buy.
- On the other hand, the company is growing like kudzu. And we think investors should take a hard look.
- One of the three bullish analysts, Charlie Rentschler of Wall Street Access, ticks off several reasons why he thinks Cummins' earnings could double in the next several years. First, he says, "There's no other American company that's done such an incredible job of sticking its roots down into China and India." Cummins has had joint ventures in in India since the 1960s and China since the 1970s. Of the three new engine plants Cummins is building, two are in China. Many Beijing buses, part of the biggest bus company in the world, run with Cummins engines.
- Such engines are Cummins' bread and butter. The company makes diesel- and natural-gas-powered engines for trucks, buses and RVs. But it also has an important and growing business making generators for factories, offices, hospitals and the like. Generator sales are growing particularly briskly in countries where power is less than dependable. Cummins' Standby Power systems, for example, make sure a building will have power when the grid crashes.
- Second, Rentschler says, "Cummins has superior technology." Case in point: Cummins is "in the vanguard" of developing car and truck diesel engines that must meet increasingly tight pollution controls.
- This leads to Rentschler's third point, which is how far ahead of rivals Cummins is in getting its wares to markets. The company has already announced that it's ready for the stringent, near-zero 2010 emission standards for diesel engines, beating many other engine makers to the punch.
- The analyst, by the way, is the only one of the 11 following Cummins who once worked for the company. He says he spent ten years in operations there.
- What could go wrong? Well, lots of well-known, well-managed companies, such as Caterpillar (CAT) and Deere (DE), make engines. And most of Cummins' sales go to companies, such as big truck makers, who also make their own engines.
- Plus the engine business is notoriously cyclical. For example, new emission standards for big truck engines in 2007 caused a spike in sales for the 2006 models and a crash in the first half of 2007. Cummins' truck-related sales dropped 40% in the first half of 2007, according to Morningstar.
- Morningstar analyst Ben Butwin sums up the strategic case against Cummins when he writes: "The company's recent results are impressive, but we don't see any sustainable competitive advantages to keep rivals at bay."
- It may well be that analysts badly underestimated Cummins' earnings in the first half of 2007 because they didn't fully appreciate the company's ability to innovate. In the first quarter, analysts on average estimated profits of 86 cents a share; Cummins posted $1.42. For the second quarter, analysts had $1.59 per share, and Cummins reported $2.13.
- Analysts are looking for an 18% earnings gain, to $9.12 per share, in 2008. Rentschler says Cummins can earn $14 to $15 a share by 2011. That could mean a near-doubling of profits from 2007 levels.
3) Investors Business Daily reports on Freeport-McMoran (FCX)
- Freeport-McMoRan Copper & Gold's acquisition of rival Phelps Dodge in March marked a major turning point 15r the mining company.
- The purchase made Freeport (FCX) the world's largest publicly traded copper company and created a powerful force in the mining industry. It brought together Freeport's Grasberg mining complex, the world's largest copper and gold mine in terms of reserves, with Phelps Dodge's 14 mines in operation or under development in North America, South America and Africa. The Grasberg mine, located in Indonesia's Papua province, is Freeport's flagship mine.
- With Phelps Dodge in its mix, Freeport boasts large, long-lived, geographically diverse assets and significant proven and probable reserves of copper, gold and molybdenum.
- "No question this was a good move," said analyst Bill Selesky of Argus Research. "It was a home run from the beginning." Wall Street also gives the buy a thumbs up. Freeport's stock price has nearly doubled since the deal closed on March 19, and its shares are trading near an all-time high.
- For its part, Freeport's management team is considered one of the best out there, Selesky says. Freeport assimilated the acquisition into the company a lot faster than people would have thought, Selesky says. The company says the smooth integration of the Phelps Dodge buy has produced unexpected savings in the tens of millions of dollars.
- Buying Phelps Dodge helps Freeport increase its reserves, Selesky says. "Rather than Freeport having to spend tons of money on exploration and finding new places to get copper, it made an acquisition of a company with great assets," Selesky said.
- The acquisition comes at a time when copper is a pretty hot commodity. There's strong demand for copper from China, in particular. Overall, worldwide copper consumption is up about 6% this year over last year. At the same time, there have been supply disruptions around the world due to labor strikes and natural disasters such as floods and earthquakes. In the first nine months of the year copper prices have been about 10% higher than the year ago period.
- Freeport has paid down nearly half the debt it incurred from the takeover, the company says. Freeport's debt now stands at $7.7 billion, down from $14.2 billion at the time of the buy.
- Analysts polled by Thomson Financial expect full-year earnings to rise 21% to $8.26 a share, and 16% in 2008. Copper consumption is tied to housing. About 40% of its usage goes into wiring for houses, and the next biggest use is in building products. With the U.S. housing market in a slump, U.S. copper consumption is down about 8% through midyear, says Stundza. But a lot of copper production goes overseas, which is where the growth is coming from, adds Selesky.
- "Asia, particularly China, is the growth story," he said. "Their standard of living is rising and with that comes development of additional housing. They don't have enough copper in their country to build the infrastructure and housing."
4) Some analysts comments on Shaw Group (SGR)
- An analyst downgraded shares of Shaw Group Inc. late Thursday, despite the construction and engineering company reporting a swing to a profit of $54.6 million in the third quarter. Citi Investment Research analyst Brian Chin downgraded Shaw stock to "Hold" from "Buy" but increased his price target to $74 from $70 per share after the company won contracts to operate two U.S. nuclear plants.
- The downgrade comes at a time when Shaw's focus on energy development is "cyclically high" and about to coincide with an upswing in spending for the sector, Chin said.
- "At this time we think a lot of expansion in these markets has been already priced into the stock," he said in a client note. "Risks we see to the story include cost overruns on problematic contracts, a downturn in the forward commodity price outlook, and failure to capture future project wins."
- UBS analyst Steven Fisher, however, sees potential for growth in 2008 and upgraded his price target for the company to $72 from $56. "We believe Shaw, in theory, could report growth from the third quarter's results based on recent strong growth in the backlog, tight industry capacity, and Shaw's effectively guiding to revenue growth of roughly 23 percent," Fischer said in a client note. He reiterated his "Neutral" rating on the stock.
- Citi's Chin wrote that one growth area might be India where potential to run up to 12 nuclear plants is being sought aggressively by the company. Many diplomatic hurdles, including International Atomic Energy Agency and U.S. government approval, would need to be overcome. India is not a member of the Nuclear Nonproliferation Treaty. "It is not clear whether India would want to agree to the terms of nonproliferation to get civilian nukes, since nuclear weapons are a politically popular asset in India," Chin said.
- Motley Fool chimed in on the nuclear angle as well: "CEO Jim Bernhard described the nuclear market as "very, very robust." In China alone, the company has booked $700 million in backlog for four new plants. The U.S. is the biggest nuclear market of all, and thanks to Shaw's investment in Westinghouse, it's going to be deeply involved in the nuclear renaissance right here at home.
Long National Oilwell Varco, Cummins Engine, Freeport-McMoRan Copper in fund; no personal positions
