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Cummins: A Paragon of “Growthiness”
10/30/2014 9:46 am EST
Growth is hard to come by, so shares are valuable for any company with both solid growth prospects and a way to grow growth, which is why MoneyShow's Jim Jubak is raising his target price on this engine manufacturer as of Wednesday, October 29.
Maybe saying we’re in a global growth crisis strikes you as a little extreme. I don’t think so, as I look around the world and see strong evidence of a slowdown in the fundamental underlying secular rate of growth in developed economies and in a big swath developing economies, especially China. I do think we’re looking at something more than just a cyclical slowdown that’s a hangover from the Global Financial crisis. I’ll make my case for a global growth crisis in a post in the next week or so.
In the meantime, I think we can all agree that right now growth is hard to come by. And that makes the shares of any company that has either solid growth prospects because of the market that it’s in or because it has figured out how to invest in growth even in tough times especially valuable.
Of course, companies that have got both of those growth advantages going for them are especially, especially valuable.
Where do you find such paragons of growthiness? (“Growthiness” is similar to Stephen Colbert’s “truthiness” but growthier.)
You can start with Cummins (CMI) in my Jubak’s Picks 12-18 month and Jubak Picks 50 long-term portfolios. Cummins also gives investors a useful template for finding other growth stars for a slow growth global economy.
When I added Cummins to my Jubak’s Picks portfolio in May 2010 (the shares are up 118% since then), I cited two reasons. First, the cyclical reason: after truck owners and trucking companies had postponed buying new trucks during the Great Recession, Cummins was looking at huge pent-up demand for its new diesel engines. That worked pretty well in 2010 (revenue grew by 22.5%) and 2011 (36.5%). Second, the company had used the bad times in the economy in general and the truck sector in particular to cut costs and to push ahead with R&D investments. Morningstar estimates that Cummins cut its breakeven point because of these cost reductions to sales of 250,000 engines a year from the previous 300,000. The company’s investments in R&D enabled it to become a key component supplier to its competitors in the diesel-engine business.
Competitors buy components from Cummins because the company’s technology is enough better so that most competitors who want to improve engine efficiency or reduce emissions buy from Cummins rather than make components themselves. Today, Cummins gets 30% of its sales from parts and services, up from 18% in 2005, and it has gained 10 percentage points of market share in the US heavy-duty industry over the last decade.
Which is not to say that everything has gone well for Cummins in the last couple of years. Sales fell by 4% in 2012 and 0.2% in 2013. Gross margins stayed relatively steady at 26% in 2012 and 25.3% in 2013 but that was, in itself, a disappointment to a Wall Street that was looking for margins to expand as Cummins gained market share and as cost reductions kicked in.
It hasn’t been a great 12-months for Cummins shares—they’re up 15.1% versus 14.2 for the Standard & Poor’s 500 index (SPX) as of the close on Wednesday, October 29. That performance is not quite as good as the raw numbers suggest, since Cummins climbed 7%—almost half that 12-month gain—on October 28 alone.
On that day, Cummins reported third quarter earnings and gave guidance for the remainder of 2014 that strongly suggests that the company is moving past that growth soft spot. For the quarter, Cummins reported earnings of $2.32 a share, 3 cents a share better than the Wall Street consensus, on revenue of $4.89 billion. That was above the consensus forecast for $4.72 billion and represented revenue growth of 14.6% year over year. The driver for that growth was stronger demand in North America—up 19% year over year—and enough strength in Europe and China to offset weakness in Brazil and produce 10% growth in international sales.
Cummins also raised its guidance for all of fiscal 2014 to forecast growth of 10% to 12% for the year (up from 8% to 11%) to revenue of $19.03 billion to $19.38 billion versus the consensus projection of $19 billion.
And it looks like the company has put that margin issue behind it. In its guidance, Cummins said it expected EBIT margin (earnings before interest and taxes) of 13% to 13.5% against the previous guidance of 12.75% to 13.25%. In the engine division, EBIT margin is forecast at 11% to 11.5% (up from 10.5% to 11.5%) and in the components unit, EBIT margin was guided up to 13.5% to 14.0% from the previous 13% to 14%.
I’ve been looking for a quarter like this from Cummins so I’ve got much of this good news built into my target price of $175 a share. I am going to tweak that target just a bit to $181 today.
Obviously (I hope) I’m keeping this stock in my portfolios.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. (Please don’t read any call on the market in that cash position. It just takes longer than I’d thought to wind up a fund business.) I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.
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