Update Cummins (CMI) in my Jubak's Picks portfolio

05/01/2012 5:27 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Cummins (CMI) has sold off today—the shares were down 4.3% at the close--after it reported earnings of $2.38 a share and revenue of $4.47 billion for the company’s first quarter.

Those earnings were 18 cents a share above the Wall Street consensus. Revenues were slightly above the Wall Street projection of $4.41 billion.

And the stock sold off?

Three reasons for that, I think.

First, normal sell-on-the-news profit taking. Shares of Cummins were up 32% for 2012 as of the close on April 30. (Cummins is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/ .)

Second, a normal what-have-you-done-for-me-lately sell. Cummins didn’t raise its guidance for 2012, instead confirming the previous forecast of 10% revenue growth (to $19.85 billion) with earnings per share in the range of $10.15 to $10.50. The revenue figure is slightly below the current Wall Street consensus of $20.1 billion for 2012. The earnings forecast isn’t very exciting to a Wall Street that has already set the high end of its earnings range at $10.80. The consensus is at $10.39 a share.

Third, the company’s report puts more of its eggs in the basket labeled U.S. economy just at a moment when doubts about U.S. economic growth have increased. In the first quarter the company saw weaker demand in the truck market in Brazil, the construction market in China, and the construction and power generation markets in Europe.  That weakness was offset by strength in North America—revenue in North America grew by 40% year to year--so that sales of engines climbed 20% year to year and sales of components climbed 19% year to year. Margins were strong in both those units at 13.3% and 13%, respectively.

Nothing surprising in the results for this quarter.

But the company’s projections for the rest of 2012 were enough to give investors pause. Cummins previously projected that revenue in China would be flat in 2012. In this quarter’s conference call it changed that to a forecast of a 5% decline. Some markets in China will show even more of a decline with excavators, for example, down 15% in 2012.

That pushes more responsibility for making the company’s 2012 projections onto North American sales. First quarter sales of heavy-duty truck engines, which track sales of heavy duty trucks, rose by 84% from the first quarter of 2011 and Cummins’ share of the North American engine market for heavy duty trucks hit 45% in the first quarter. But North American orders for heavy-duty trucks have been soft lately. Cummins clearly believes that softness is temporary: the company kept its forecast for North American heavy-duty truck production at 279,000 in 2012.

If the company is wrong, its increased reliance on U.S. sales to meet its guidance for 2012 will make the miss painful.

My take on all this is that it’s too early to tell what the slow down in truck orders means for 2012. At this point I think it’s likely that the slump is just temporary and that Cummins is correct on its read for the year. But the worries about the U.S. economy make me cautious. A 4% drop isn’t enough to make me buy more of this stock. But right now it’s not enough to lead me to sell either. I’m going to keep my target price for Cummins at $145 a share but I’m going to stretch out the schedule to October from the current July.

All this is subject to review if U.S. economic growth shows signs of slowing by more and for longer than expected.

Full disclosure: I don’t own shares of any of the companies mentioned in this post 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 December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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