Cramer's Mad Money - Cummins Is King. No Offense, Caterpillar (2/2/11)

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Includes: AGN, APKT, ARMH, CAT, CHK, CMI, DVN, RRC
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Wednesday February 2.

CEO Interview: Tim Solso, Cummins Engine (NYSE:CMI), Caterpillar (NYSE:CAT)

Cramer wanted to find out what is happening under the hood at Cummins (CMI), which reported what Cramer considered a "stellar" quarter, with a 3 cent earnings beat and a 22% rise in revenues. The Street's reaction was lukewarm, as the stock went up only $1.50 only to drop 52 cents on Wednesday. Cramer thinks Cummins is 8 cents off its high because of the company's tendency of giving conservative guidance, since it is committed to the principle of "under promise, over deliver."

This engine producer and power generation play is on the verge of a huge truck replacement cycle, not only because fleets tend to be old, but also because their engines need to meet new environmental standards. Half of the engines in the top fleets are Cummins engines, and Cramer thinks the stock has as much as a $10 per share earnings power while The Street estimates only $7. Cummins' stock has risen 53% since Cramer recommended it last June.

"When the Chinese want engines, they come to Cummins," said CEO Tim Solso. Chinese sales rose from $3.1 billion to $3.6 billion last year. The company has raised its R&D budget by 40% to develop engines to meet new environmental standards. When asked if the company's guidance was too conservative, Solso said "It is possible. We try to be realistic as possible and deliver on what we said we would do." Solso sees a 40% increase in truck sales, and noted the company's market share is 10% in China, 40% in India, 48% in Brazil. Even as China is slowing down its economy, Solso expects a 20% increase in Chinese sales for 2011.

Power generation should be strong in emerging markets because the rising middle class puts pressure on old grids, but Solso predicts a recovery in North America power generation by the end of 2011. Solso expects power generation demand to be strong for the next 20 years.

"You are the best there is," Cramer told Solso. "Cummins is the best manufacturer of engines in the world. No offense to Caterpillar (CAT), which I also like."

Chesapeake Energy (NYSE:CHK), Devon (NYSE:DVN), Range Resources (NYSE:RRC)

Will the possible fall of the Mubarak regime in Egypt lead to the replay of the 70s oil crisis that crippled the U.S economy? This could only happen if the U.S. doesn't have enough fossil fuels to provide for its own needs. Contrary to popular belief, according to CEOs of Chesapeake Energy (CHK), Devon (DVN) and Range Resources (RRC), the U.S. does have enough fossil fuels. Thanks to revolutionary drilling techniques, an additional 50 billion barrels of oil have been discovered, and there is enough natural gas to fuel the nation, if engines were developed to run on the fuel. With electric cars wildly expensive and ethanol bringing up fuel prices, natural gas and new oil supplies are the best way the U.S. can declare its independence from OPEC.

CEO Interview: David Pyott, Allergan (NYSE:AGN)

The Street has yet to see the inner beauty of Allergan (AGN) which started Wednesday down 5 points before rallying later in the day. The company missed earnings by a penny, but reported a strong quarter with sales up a better than expected 6.9%. The "miss" came from higher administrative spending, tax rate hikes and an increased share count. The stock has risen 70% since 2009 when Cramer recommended because of the rise in spending on medical aesthetics with the economic recovery.

David Pyott said R&D spending has increased to as much as 16% and the company will have more clinical programs than at any point in the company's history. Cramer called the recent quarter a "transition quarter" with the FDA approval of Botox as a migraine treatment (a development Pyott refers to as Allergan's biggest story) and approval of lap band surgery for a wider range of clients. Healthcare reforms in the U.S. and Europe cost the company 23 cents per share, and this combined with R&D spending still did not prevent the company from raising guidance. Allergan is researching treatments to prevent macular degeneration and the company has one of the richest pipelines in the urology space.

"What we want out of a drug company is growth, ideas and approval. Allergan has all of that, "Cramer said, "Own it!"

Acme Packet (NASDAQ:APKT), ARM Holdings (NASDAQ:ARMH)

Tech has the best opportunities Cramer said he has ever seen, although the bears say stocks like ARM Holdings (ARMH) and Acme Packet (APKT) are too expensive. APKT, which is up 685% since Cramer recommended it in 2009, and ARMH, up 280% since Cramer got behind it in 2009 were both up on Wednesday, APKT $11.43 on a spectacular quarter and ARM Holdings up 14%. The multiples do seem rich, both above 50, but Cramer thinks these stocks are going higher because they are revolutionary. Unlike the dot.com stocks, these companies make real money and are developing products as revolutionary as the cotton gin or the light bulb. "I would still be a buyer of both," Cramer said.

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