Wednesday, February 11, 2009

Wall Street Journal: Cummins Engine (CMI) Shifts Gears Amid Stall

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We closed out our position in Cummins Engine (CMI) in September 2008 but I still like this industrial for the long run, due to excellent positioning in Chindia. I also like it because it's one of those "old school" US companies that deals in a wild and crazy area: making stuff other countries want. (ground breaking concept). An interesting piece on how the global economic slowdown is affecting even the best of breed companies; and how quickly it came about. Also yet another signal from China that things are not quite so rosy as the bulls would have you believe.
  • Cummins Inc. sailed through the first 10 months of the U.S. recession, adding more than 3,000 employees and posting two record quarters of sales and profits, largely on strong exports of its diesel engines and power-generation systems.
  • Then, in October, a Chinese business partner warned Cummins President Tom Linebarger of slowing truck sales, reenforcing the executive's hunch that the good times were about to end. He quickly threw Cummins into reverse, and since October, the company has eliminated 5,000 jobs, cut hours, frozen salaries and reduced executive pay.
  • "We chased demand until September," Mr. Linebarger says. Now, he's racing to keep pace with falling revenue, highlighting a management challenge playing out elsewhere as executives change plans on the fly.
  • In October, Mr. Linebarger met with Xu Ping, the head of Chinese vehicle maker Dongfeng Motor Corp., which has a joint venture with Cummins. Mr. Xu told Mr. Linebarger that the local market for big trucks "had never been worse." In November, customer orders in growing export markets, such as Brazil, Russia, India and China, slowed sharply.
  • Cummins, too, was riding high in July, when it posted the highest quarterly sales and earnings in its 90-year history. There were signs of trouble: Sales of engines for the Dodge Ram heavy-duty pickup truck, a key product, were down 60% from a year earlier. But Cummins quickly shifted idle workers to overtaxed factories making fuel systems and high-horsepower engines.
  • Cummins had been growing rapidly. Its work force was up to 41,000 employees from 24,000 in 2002. Exports propelled most of the growth, accounting for roughly 60% of Cummins's revenue last year, up from 40% in 2002.
  • Last week... reported a 55% drop in fourth-quarter net income and projected that revenue would decline 20% this year.
Speaking of which - the Wall Street Journal had a quick piece about our favorite "measure of global growth" Tuesday - the Baltic Dry Index.
  • The Baltic Exchange's Baltic Dry Index, which measures the cost of shipping raw materials and is widely considered a leading economic indicator, has bounced 174% from a 22-year low last December. The rebound is the latest hint of a slight easing of the global recession.
  • Shipping costs probably have seen their bottom for the cycle. But the Baltic Dry can send false economic signals, having done so at least twice in the past two years. It soared through the summer and fall of 2007, heralding nothing of the recession around the corner. It jumped to a record high in the spring of 2008, as the financial markets and economy were preparing for another swan dive.
  • The Baltic Dry is heavily influenced by commodity demand from China. Snowstorms, the Olympic Games and other China-centric phenomena sparked the index's leaps and swoons last year.
  • The current rally is largely due to China's rebuilding iron-ore inventories after the Lunar New Year holiday. Many observers doubt that the restocking will last much longer and see little appetite for commodities outside of China. (someone's been reading our blog) [Feb 9: China and the Baltic Dry Index - What's Really Going On?]
[Jul 30, 2008: Cummins Engine Continues to Quietly Execute]
[Apr 30, 2008: Cummins Engine Excellent Report on Strong International Sales]
[Apr 18, 2008: Restarting Cummins Engine as the Rest of the World Moves on Without USA]
[Sep 23, 2007: Stock to Watch: Cummings Hitting on all Cylinders]

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