Update Cummins (CMI)

07/27/2011 1:56 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

During the company’s July 26 post-second-quarter-earnings conference call, a Wall Street analyst asked management at Cummins (CMI) the big question: How can business be so strong for Cummins when the global economy has so many problems and when Cummins’ competitors are lowering their forecasts for future growth? (Cummins is a member of my Jubak’s Picks portfolio http://jubakpicks.com/ )

The company said that it sees stronger than expected growth in North America and huge momentum in China even with recent deceleration in the Chinese economy. And that it has managed its inventories of parts and components to avoid the shortages that have dinged competitors such as Paccar (PCAR).

And saying that the company raised its full-year sales outlook to $18 billion from an April forecast of $17 billion and raised projected EBIT (earnings before interest and taxes) margins to 14.5% from 14%. That works out to $8.70 a share in earnings for 2011 against a current Wall Street consensus of $8.14 a share and April guidance of $7.75.

Why should investors believe these guys? Well, the quarter that they just delivered certainly earns them some credibility. Revenue came in at $4.64 billion, a 20.2% increase from the second quarter of 2010 and significantly above the $4.26 projected by Wall Street. Earnings of $2.41 a share beat estimates by 41 cents a share.

Every segment of the company’s business delivered. Shipments of engines for heavy trucks climbed 159% year over year and 61% from the first quarter. Medium-duty truck and bus shipments climbed 101% from the second quarter of 2010 and 35% from the first quarter of 2011.

North America is now less than half (43%) of the company’s revenues. For 2011 Cummins is forecasting 22% growth in China (now 9% of revenue) and 26% growth in India (now 5% of sales.)

Even with slowing economies in the United States and Europe, I think $153 a share is a reasonable target for these shares by March 2012. As of July 27 I’m upping my target price to that level from a previous target of $150 by December.The stock closed at $110.82 on July 26.

Full disclosure: I do not own shares of Cummins in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Cummins as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


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