Last time I looked at Cummins (CMI), I wrote an article titled: "Cummins: Can It Keep Growing in Value?" I then went on to explore how the company has grown so much and wondered if it could continue to move up. This is what I concluded:
"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."
The stock has since grown another 5% from the writing of my first article and it continues to look strong. For this reason, I do not think it is a surprise that it beat analyst estimates for the quarter. 4Q EPS came in at $2.00 instead of $1.75 and revenue was $4.3 billion, above the $4.04 billion estimates.
While the stock moves up, it is ironic that less than two weeks ago Jefferies downgraded Cummins Inc. from Buy to Hold (January 30) and maintained a $105.00 price target. The analysts said:
"CMI shares are up 30% from Oct. lows and are just 10% below all time highs. The shares are trading towards the upper end of the historical ranges based on 2013 Consensus, which already calls for a healthy re-acceleration of growth from 2H12 levels. Longer term, we view CMI as a core holding."
Jefferies is of the opinion that the stock is coming close to the end of its long-term bullish trend. Cummins may have given some substance to this when it announced a strong spring buying season for construction machinery in China likely wouldn't revive demand for its engines used by Chinese equipment manufacturers. This could also take wind out of the temporary bullish sails.
I have written about a possible slow down coming to the present 4 month bullish run, but looking at the chart, one would never know this. As the stock moves up, I am still observing the middle Bollinger Band as support and it does not look like it is weakening. The RSI indicator continues to move sideways hugging the upper levels of the indicator region ('70') market but also staying below it so it does not signal over bought conditions. The MACD is just as supportive as the RSI as it sits at the very top of the indicating region. It gives no signal of a slow down.
Trade Recommendations for Cummins
I am also of the opinion that Cummins is coming close to the end of its bullish run, but I do not see signs that it will happen in the next few weeks. Does that mean I think the stock is a good investment at this point? No I don't, and let me share my reasoning. The stock does not grow very fast and it is within about 5% of its historical ranges so I do not believe the stock will grow that much in value before it slows down. For this reason, if you own the stock, hold it and if you don't own it, there may be better investments for long-term investing growth.
I do not believe the stock is done growing yet, I believe as 2013 unfolds Cummins has positioned itself to benefit from the fuel efficiency standards set for engines in 2014 and 2017. Dr. Steve Charlton, VP of engine business had this to say about the company's positioning for these standards:
"The emissions technologies in use today provide the foundation for meeting the 2014 standards, and Cummins is ready to meet this regulation in 2013."
These new regulations were proposed back in October of 2010 after President Obama directed the agencies to coordinate efforts and propose a single national GHG reduction and fuel-efficiency program.
Short-Term Income Play- the stock is presently trading at 119.04 and I am confident that momentum will keep the stock moving forward in the short term. I can see buying an outright option and holding it for resale.
- Buy the March 120 call option with a price of $2.40.
- Net Debit to start: $2.40
- Maximum Profit: unlimited
- Length of Trade: 5 weeks
The stock has good momentum presently and it is trading close to 120 now. I believe a short-term supplement trading strategy like this could add to the growth of one's portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.