Wednesday, July 30, 2008

Cummins Engine (CMI) Continues to Quietly Execute

Cummins Engine (CMI) has been beaten down with the rest due to its subprime (err, that's not it)... due to its natural gas (err, that's not it)... well I don't really know why other than it opens on the stock exchange every day and hence should be sold. I continue to like this long term story, and earnings continue to shine through. The is a prototypical stock we want to own as it increasingly avoids America - overseas exposure continues to be very under estimated by the investing community. The stock is up 10% this AM. Full report here.

Folks at this point about 1/3rd through earnings season, this could be the best our stocks have performed in any earnings season since we launched - we are seeing impressive stuff across the board, even outside the commodity space. But this is the worst our fund has performed in any earnings season since our stocks are not the flavor of the day. Only on Wall Street... only on Wall Street. I shudder to think what would happen if one of our stocks dared to miss if this is how they are treated when they are all smashing earnings estimates. That is usually the fear I have going into an earnings season - but now we are being punished even on good earnings. Even the gains are short in nature and quickly reversed.

Frankly this is why it is hard for me to get bullish for more than a 48 hour period. If we are not rewarded for standout earnings, than we have to buy the junk of the market. Stuff that only rebounds for a short time before they continue their wayward swirl down to the sink. With our time horizon, it's not in our playbook to do that on a consistent basis. So we have to remain patient and eventually stocks are a reflection of their earnings power. But certainly they are not in the short run. But on a fundamental basis, I am absolutely thrilled with what our companies have been reporting. Our stocks continue to get "cheaper" as prices fall or flatten as earnings increase. While the "flavors of the day" continue to get "more expensive" as prices increase on falling earnings. But this is the market of today, and in due time - it will reverse. But it doesn't feel too swell right now to watch this unfold. July 2008 - the month that will go down in infamy for Rising Tide Growth fund! Bah.
  • Cummins Inc (CMI), a U.S. maker of engines and power generators, said its earnings in the second quarter rose a better-than-expected 37 percent as strong international sales overshadowed weakness in some key North American markets.
  • Cummins reported a second-quarter net profit of $293 million, or $1.49 a share, up from $214 million, or $1.06 a share, in the same period in 2007. Analysts' average profit forecast was $1.23 a share, according to Reuters Estimates. The results included a $6 million charge related to damage to several facilities caused by this summer's flooding in the Midwest. Ann Duignan, an analyst at JP Morgan, estimated that cost the company 2 cents a share. "Without this, EPS would have come in at $1.51," Duignan said.
  • Sales at the Columbus, Indiana-based company rose 16 percent to $3.89 billion, ahead of an average forecast of $3.86 billion.
  • Some of the sales growth came from strong sales of its commercial generators to customers in the developing world, including the Middle East, Latin America and China.
  • Cummins said sales outside the United States accounted for 61 percent of its business during the quarter, up from 54 percent in all of 2007 and 57 percent in the 2008 first quarter.
  • Sales of its more consumer-related products in the United States tumbled during the quarter as falling home prices, tight credit markets and rising energy costs soured consumer confidence and kept buyers out of truck and motorhome showrooms.
  • Cummins said sales of diesel engines to Chrysler for the Dodge Ram heavy-duty pickup fell more than 60 percent, and RV engine sales fell nearly 40 percent.
  • Looking forward, the company expects full-year sales to grow 15 percent, up from a previous forecast of 12 percent.
Now as much as I like this story we see a potential top forming and everything good is to be sold in this trecherous market; all gains are erased quickly. So I'm taking this down to a 0.1% holding position and selling the remaining portion around $74. Frankly I didn't hold much since I sold on that spike to low $70s last week. And we will buy back on a pullback... or if the stock continues upward through the $75 level we'll buy on "technical" strength. Right now good results are not keeping stocks up for long so until that pattern changes we'll obey the markets wishes and sell strength. No change to the story fundamentally - in fact it improves each quarter. I'm not the best technician but this appears to be a chart every hedge fund computer would buy north of $75 (on strong volume).

[Apr 30: Cummins Engine Excellent Report on Strong International Sales]
[Apr 18: Restarting Cummins Engine as the Rest of the World Moves on Without USA]
[Sep 23: Stock to Watch: Cummings Hitting on all Cylinders]

Long Cummins Engine in fund; no personal position

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