Friday, April 18, 2008

Bookkeeping: Restarting Cummins Engine (CMI) as Rest of World Moves on Without USA

Caterpillar (CAT) had good earnings that (drumroll) relied on great international sales, and a weak dollar.
  • Booming economies overseas powered Caterpillar's CAT first-quarter earnings past Wall Street's expectations, despite a "recessionary storm" in the U.S.
  • Cat CEO Jim Owens said the company sees "robust demand for products used in the global mining and energy industries and for machines used by our customers to build infrastructure, particularly in emerging markets."
  • "Even though we're currently weathering a recessionary storm in the U.S., we expect the rest of the world to continue to invest in infrastructure growth well into the next decade," said Owens.
So did Honeywell (HON)
  • Diversified U.S. manufacturer Honeywell International Inc (NYSE:HON) on Friday posted profit that topped Wall Street's expectations, as strong growth outside the United States overshadowed weak demand for consumer products such as thermostats and antifreeze.
  • Honeywell cited Asia and the Middle East as "leading the way" in growth and noted that two-thirds of its 10.6 percent revenue rise came outside the United States.
These results play on my theme of avoiding the US and looking overseas - even as they *will* slowdown to some degree... there is simply no real growth in subprime nation - we rely on credit creation and consumerism outside of a few export sectors - that really cannot create much other than inflated paper wealth (accompanied by inflation) This is the bed we have sown, so now we lay in it - enjoy.

I am now looking back at old holdings that are industrial in nature and am going back to Cummins Engine (CMI) - which has great exposure to India and China. This was a previous fund position, that I closed in November [Nov 13: Closing Cummins Engine] correctly anticipating a selloff and weak period for these type of names.

For much of the same reasons I closed the other 3 positions earlier today I am closing Cummins Engine (CMI) although I love the story long term and *will* return. This is more of a technical call and slowing US economy call - I still think this is a premium franchise way ahead of the game in China and India.

Frankly folks, the weak US peso is even more of a benefit to US multinationals than I anticipated... company after company is beating simply on currency exchange and roaring foreign markets... kind of makes you jealous to be sitting here in subprime nation. Anyhow, I am a big fan of Cummins and wrote a long piece on the name back in September [Sep 23: Stock to Watch: Cummings Hitting on all Cylinders]

Some highlights:

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.

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.

Technically the stock is breaking out of a very long base (4 months), it is up 8% today so I have to pay up, and I'll add more if I see a break ABOVE the 200 day moving average of $55; stock currently in the $53s. It is still meaningfully down from where I sold it, which was $118 or split adjusted $59. So the stock has done nothing for 5 months, and I can now get back in for 10% lower. We'll see how it works out, I still have major concerns of slowdowns - but this type of position is a nice offset to the commodity heavy stakes I own. Earnings are April 30th so we'll see if the "weak dollar" gives them a huge boost too - but the stock is very cheap. $4.51 in 2008 earnings and $5.39 in 2009 which is a forward PE of under 12 for a solid 20% grower...

I am restarting Cummins Engine with a 2% stake bought in the $53s... and yes I wish I had bought at $50 on the dip this morning ;) I continue to mostly avoid companies that rely on the weak, no growth subprime nation...

Long Cummins Engine in fund; no personal positions

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