Can Cummins Back Up Its Bold Earnings Prediction?

09/15/2011 4:20 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s not just what Cummins (CMI) told Wall Street analysts on September 13. It’s that the company said it at all.

I mean, Cummins knows there’s a global slowdown going on, and yet the company’s CEO and COO got up and said that Cummins would hit $30 billion in annual sales in 2015, up from $18 billion today and a 14% compound annual growth rate.

And that EBIT (earnings before interest and taxes) margins would expand to 18% from 14.5% today. And, the capper: that earnings per share would hit $20 in 2015.

That makes today’s share price of $93.08 equal to a 2015 price to earnings ratio of 4.87. You’ve got to wonder why the stock climbed only 6.9% on the news that day. (Cummins is a member of my Jubak’s Picks portfolio.)

If you suspect that they’re putting something strange in the water out there in Columbus, Indiana, you’ll be reassured to know that Cummins can actually make a logical case for this optimism.

  • The rising price of oil will increase the demand for fuel-efficient (that is, diesel) engines.
  • Tighter regulations on diesel pollution work in Cummins’ favor, as the company is a leader in low-emissions diesel technology
  • Growing need for electricity—and need for fast solutions—will add to demand for company’s power generators
  • Cummins continues to build market share in emerging economies
  • The truck-replacement cycle in developed economies still has quarters to play out. (During the Great Recession, trucking companies didn’t replace their aging trucks. That has created a huge backlog of demand.)

Revenue at Cummins grew 22% in 2010, and the company’s comments say that projections like those of Standard & Poor’s for 44% revenue growth in 2011 aren’t out of line.

The only thing holding this stock back right now is investors’ fear that the global economy is going to slow and that everybody’s revenue growth is headed down.

In its comments in last quarter’s conference call and in the September 13 analyst meeting, Cummins has clearly said that it knows the global slowdown story, that it feels the effects in some markets, but that it is seeing enough growth in new markets and new products to make up for the larger picture.

I’m not going to raise my target price of $153 by March 2012 on these shares today. Financial market conditions will weigh even on a stock with a story like this.

But I’d certainly be thinking of picking up some shares at current prices, even with that macro background.

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares in Cummins as of the end of June. For a full list of the stocks in the fund as of the end of June, see the fund’s portfolio here.

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