How Does Cummins Do It?

07/27/2011 4:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

During the company’s post-second-quarter-earnings conference call on Tuesday, a Wall Street analyst asked management at Cummins (CMI) the big question: How can business be so strong for the company 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.)

The company said that it sees stronger than expected growth in North America and huge momentum in China, even with the 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. 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 here.

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