Cummins (CMI) has had a great fall. With 2013 here, what can we expect from the company this year and beyond? How will natural gas affect the company and what is it doing to prepare for the increase in usage of LNG?
Cummins' Sector Looks Positive
One good sign for Cummins and the machinery sector as a whole was that the sector was recently upgraded by the ISI Group. Why did they upgrade it? ISI Group states that an inventory reduction has started for the sector. Inventory reduction means clients are buying equipment and this bodes well for the companies in this sector like Deere (DE), Eaton (ETN), Caterpillar (CAT) and Illinois Tool Works (ITW), just to name a few. ISI also thinks that investors should keep their eyes on Caterpillar. As one of the laggards of 2012, it could be a top performer the first quarter of 2013.
Cummins Adaptation to LNG in Transport
Well, for future market development, a Cummins-Westport coop is developing a natural gas version of Cummins' 6.7 liter ISB engine suited for medium duty trucks, school buses, and vocational applications. Cummins has three other engines in a new school of natural gas engines: (8.9, 11.9, and 15) liter. This is good positioning for the future as transport moves into natural gas. This company will profit greatly when the natural gas boom comes to the transport industry. I do not expect it to happen soon but it is on its way. What will it take for more and more transport vehicles to convert to natural gas?
Last year, 40% of all trash trucks sold were natural gas powered. An infrastructure of cooled LNG stations that can serve long haul heavy trucks is the next point of evolution. Here is an example of how this will work. Look at this joint venture:
- A positive step towards this objective is an agreement between Encana Natural Gas Inc. and California-based Heckmann Water Resources (HWR).
- HWR will supply water hauling services to Encana, a big Haynesville Shale player.
- In exchange, it will create an LNG refueling station network for HWR trucks.
- HWR has recently ordered 200 long-haul vehicles from the Peterbilt Motors Corp. of Denton, Texas.
- They will be powered by LNG and CNG-adapted engines supplied by Westport Innovations Inc.
Clean Energy Fuels has plans to create 150 LNG stations across the USA by the end of the year using Flying J truck stops. Investment takes its toll on a project like this but it could pay off long term with the popularity of the growth in its fuel. Even though it has had negative earnings up to this point, Its second quarter earnings were up 24% as compared to 2011.
It s a good investment and makes good sense as long as natural gas prices remain low compared to petroleum and diesel. It appears evident that our nation's abundant supply of natural gas in combination with practical advantages afforded most particularly for LNG long-haul trucking applications will continue to become more and more attractive over time as infrastructure continues to grow. This will be attractive for Cummins investors.
Since the low point the first week of October, CMI has been moving up and has gained 29.4% in value. The move has also been strong. It has consistently used the middle Bollinger band as support (well just below that point) and this has shown strength in its move. One the last three lows, the RSI indicator has consistently gotten higher showing increased strength. While the MACD also continues to rise, I might see signs of a slowdown coming. The MACD has its own divergence going.
When I see this I am certain that a consolidation phase will be coming. Since this phase has gone on since early November, I would suspect the consolidating to start soon. There are a couple reasons this may come true. First-the MACD has reached a high point and this is also a sign of a pullback. The stock has recently bounced off a major resistance point. These observations could mean a consolidation phase coming along soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.