Cummins Shares Rally On New Buyback Program

| About: Cummins Inc. (CMI)

Shares of Cummins (CMI) have risen some 4% so far this trading week. The diesel engine manufacturer announced a new $1 billion share repurchase plan on Tuesday.

Good News Show

Cummins announced the new program after completing its current $1 billion share repurchase program, approved in February of 2011.

CEO and Chairman Tom Linebarger commented on the plan, "The announcement of this new repurchase program reinforces our commitment to shareholders and follows a 25 percent increase in the dividend announced in July. We continue to have confidence in the Company's future performance and our strong balance sheet allows us the flexibility to fund future growth and to continue to reward shareholders."

At the presentation of its third quarter earnings, Cummins furthermore announced another round of job cuts amidst poor sales figures in recent months. The company will cut 1,000 to 1,500 jobs after CEO Linebarger said the global economy remained uncertain. In total, some 2 to 3% of the total workforce will be effected by the measures.


Cummins ended its third quarter with $1.27 billion in cash and equivalents. The company operates with $724 million in short and long term debt for a net cash position of roughly $550 million.

For the first nine months of 2012, Cummins generated revenues of $13.0 billion. The company reported net income of $1.28 billion attributable to its shareholders, or $6.72 per diluted share. The company is on track to report annual revenues of $17 billion. The company could earn around $1.6 billion, or close to $8.50 per share.

The market currently values Cummins at $20.1 billion. Based on the company's net cash position, operating assets are valued around $19.5 billion. This values operating assets at roughly 1.15 times annual revenues and 12 times annual earnings.

Cummins pays a quarterly dividend of $0.50 per share, for an annual dividend yield of 1.9%.

Some Historical Perspective

Year to date, shares of Cummins have risen some 20%. Shares started the year around $88 per share and quickly rose to highs of $130 in March. Concerns about global economic growth send shares back to $85 during the summer. Shares recovered and are currently exchanging hands at $106 per share.

Shares of Cummins traded as low as $20 at the start of 2009 and steadily rose to highs around $125 per share in 2011. Between 2008 and 2012, Cummins grew its revenues by almost 20% from $14.3 billion in 2008 to an estimated $17 billion in 2012.

Investment Thesis

The new $1 billion share repurchase plan is sufficient to retire roughly 5% of its shares outstanding. The previous $1 billion repurchase plan took 22 months to complete. If Cummins manages to execute the new repurchase plan in 12 months, the company would buy roughly 40,000 shares per trading day. Based on last month's average trading daily volume of 2.5 million shares, the company will buy an average of 1.6% of average trading volume.

The buyback plan is relatively small compared to the financial resources of the company. Cummins operates with a net cash position of roughly $550 million and generates strong operating cash flows at the moment. The firm had plenty of resources to announce a much larger program. If Cummins really saw value at these levels, the company could have announced a much greater repurchase plan given its financial strength. Alternatively, Cummins could have bought more shares at lower levels in recent years.

At these levels shares are fairly valued, but I don't see compelling reasons to pick up some shares. The business is valued at 12 times annual earnings, has a strong balance sheet, and pays a decent yield to investors. The valuation looks appealing, but the company's prospects is tied to the fate of the global economy, which leaves some downside risks giving the uncertain economic outlook across the globe. Between March and July of this year, shares lost some 35% of their value on fears of a global economic slowdown.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.