Cummins Inc. (CMI) is a global company with powerful engines that can be found in heavy equipment all over the world from mining to transportation. Even though I like the company, I believe the decision to invest (in all companies) has to do with proper timing. There is an "economic reason" that would influence me to say that now is not the proper time to invest in the company. Like I said, I like the company, but I believe there's a time and place for proper investing in a company. Looking at the global economy, I don't believe the timing is right for this one.
Emerging Markets Aren't Growing Fast Enough
Large numbers of investors in Cummins trust the company to increase its business activities in the emerging markets. This is a logical assumption because some of the bigger countries like India should be able to continue to grow and this bodes well for the company because its engines would be in high demand in trucks and other heavy machinery. But this is not what happened in 2012 and I am wondering if it has set the stage for the near future for Cummins.
Some of the bigger emerging markets like China and India are finding slower growth becoming the norm half way through 2013. In fact, sales were down in China by 27% and India by 12% in 2012 alone. While global growth will come from the emerging economies, it is hard for a company to continue to grow when these markets are slowing down. Presently, less than 20% of Cummins' income comes from the emerging markets. If one is looking at these markets for growth in the future, then the company's future doesn't look real bright. Sales in these regions slumped significantly for 2012.
Investing in Cummins right now may not be the best idea. By making this statement, I am not referring to CMI as a poor investment overall, I'm just pointing out that the timing of investing may not be right. Sales through the first-quarter was not up to par, and it is expected to worsen as the year rolls on. Sales overall are expected to drop 7.3% for the year. If a company like CMI is forecasting such a drop in sales, this tells us a lot of what we can expect from other parts of the world economy that I will explain as I write this article.
Global Reasons for Slumping Sales
When I think of Cummins, I think of big trucks and transportation powered by Cummins' engines. But the company's engines are found in more than just big rigs that transport merchandise. The engines are also found in the mining industry, gas and oil, and markets that focus on generating power. All three of these industries are floundering right now, so it makes sense that the engine maker would also be pulling back its sales forecasts.
This can be reinforced by other companies that would be associated with Cummins. Caterpillar (CAT) that makes the mining equipment, if you have been keeping up with the sector, also reported a steep drop in sales the first-quarter. Inventories were reduced and sales declined in every division and every region around the world where the company has a presence.
The slowdown moves right up the chain. Cummins slows down because there is less demand for its engines. Caterpillar, that would put these types of engines in its large vehicles, slows down because the mining sector is contracting and has less interest in buying new equipment.
This is happening globally and we can use Australia as an example. The Australian Bureau of Statistics stated that domestic growth weakened, growing slower than expected for the first three months of the year. This was a huge difference in the annual gain. Previous growth was 3.2% but it dropped to 2.5% which is the slowest gain since 2011.
In Australia, the world's 12th largest economy, mining investments dropped by 4.3% because the large mining companies are under pressure from shareholders to put the brakes on spending when it comes to new projects. The uncertainty in the Chinese market is creating this problem for Australia. If you've kept track of global economic news, you would know that the Chinese economy has been slowing down quite a bit the last few months. This creates an uncertainty in commodity prices - and this is where it all starts for Cummins.
That is my economic lesson for the day. The Chinese economy has slowed down quite a bit in the last few months. This means there is less demand for growth than expected. The demand for resources naturally would slow down which would affect the mining industries. Since the mining industries are going to slow down, they will stop investing in equipment and opening up new projects. This in turn affects companies like Caterpillar that sell heavy construction equipment. And right down the line, this affects companies like Cummins that builds engines for equipment like this. For this reason, investing in Cummins right now may not be the best time.