Cummins Gets Cramerized; A New Buying Opportunity

I am flabbergasted by the reaction in Cummins Engine (CMI) today (as well as NII Holdings (NIHD). I think Cummins Engine simply got Cramerized. By Cramerized I mean, a bevy of momentum trader/Mad Money types who are new to the market flock in on a Cramer mention and at the slightest hint of disappointment flee to the hills, with their realized losses in tow. Silly.

Here is my original thesis on Cummins Engine.

Here is a Kiplinger's article a few weeks later; I wrote then

No it is not cheap. Yes it's valued higher than historical levels but (a) analysts thus far have been unable to get a grip on earnings potential and constantly undershoot so it becomes 'cheaper' on forward earnings as each quarter passes and real earnings come in higher than analysts estimates and (b) Chindia - need I say more? As I pointed out in my analysis, they have been there for a long time - they know the markets - they have the relationships. Do I see huge upside from these levels in Cummins (CMI) in the near term? Probably not. But for the next few years at least this stock should be in the sweet spot in it's market and that deserves multiple expansion as we move to a secular growth story for the next 3-5 years.

I stand by that and unlike mid October when it was not cheap - it now has become so. What are you getting? A 18-20% grower, wonderfully positioned in the strongest growing markets in the world, at forward PE on 2007 of under 14, and 2008 of under 12. Once the fuss is over, and we look out a few quarters into mid 2008 you will see a stock trading on $9+ earnings and applying a 19 PE ratio my target will be $170s. When the stock traded mid to upper $130s it wasn't quite a great one year return (30%). From here around $107, that gives me 60% upside. Even if growth slows to 15-16% you still have a lot of upside from these levels.

Is this the bottom? Who knows - I doubt it. Stocks usually get trashed for half a week to a full week after these type of 'disappointments' but the stock is now approaching its mid August lows during the credit crunch fears. With the market on shaky legs we could go lower on the name; but I like it a lot more under $110 than near $140. Again, I don't expect any near term bounces, but its time to start rebuilding this position if the market is going to offer such prices for this level of growth.

Once again, we have a company that did "beat and raise" - it simply "beat and confirmed" and that is worth a 20% haircut? For an industrial company? I'd understand for a fast growing tech company.

Strange times, but I truly believe people who only buy on momentum are in many of these stocks. I am trying to see where the next support level is, perhaps mid $90s. But at that point the stock will be traded at nearly half its growth rate? Makes sense? Only if people believe 2008 estimates are simply a mirage. Yes North America is weak but every industrial company has been saying that for 2 weeks - why the surprise?

I've pulled Cummins Engine up to 2.9% of the fund on this massive selloff. A quick look at earnings:

• I've pulled Cummins Engine up to 2.9% of the fund on this massive selloff. A quick look at earnings:

  Cummins Engine Co. shares dropped as much as 17% Thursday after the engine maker said its earnings growth was slowed by weakness in the North America heavy-duty truck market and costs associated with stricter emissions rules.

  Cummins did manage to post a 7.6% rise in third-quarter profit, but the results and the company's outlook for 2007 came up shy of Wall Street targets. The Columbus, Ind.-based company handed in earnings of $184 million, or $1.84 a share, up from $171 million, or $1.69 a share, a year earlier. Net sales climbed 20% to $3.37 billion from $2.81 billion.

  Analysts polled by Thomson Financial had expected earnings, on average, of $1.95 a share on revenue of $3.22 billion.

  In the company's core engine business, sales grew 17% even as the industry forecast for trucks calls for 180,000, about half of the tally in 2006. Cummins said it has increased its big rig truck engine market share through August to 36% from 27% a year earlier.

  Bear Stearns analyst Peter Nesvold pointed to the components side as the primary area of margin weakness, while the other divisions were mostly in line with his expectations.

  "(Components) has been the only drag on CMI's portfolio over the last several years, " he said. "And while margins in this segment are improving year over year, the trajectory has been slower than we expected. We think the market will want to get comfortable with the timing and magnitude of corrective actions."

  The components segment, which includes filtration, fuel systems and turbocharger businesses, posted a 31% surge in sales. But the company said gross margins were hit by costs associated with the rollout of new emissions-compliant products.

  Looking ahead, Cummins said it remains on pace to meet its full-year earnings guidance of $7.15 to $7.65 a share. Wall Street previously forecast full-year earnings of $7.70 a share.

  Andrew Casey, analyst at Wachovia Securities, stood by his outperform rating and said he'd recommend taking advantage of Thursday's pullback. "We continue to view the stock as benefiting from (long-term) secular trends from increased emissions reduction content, increased penetration of diesel engines in (North America) and increased exposure to Asian growth markets," he wrote in a note to clients.

  JPMorgan Securities analyst Stephen Volkmann considered the results "relatively in line with the Street." "However, Cummins has a history of beating and raising - of which neither transpired this quarter," he said in a client note, predicting the stock decline.

Long Cummins Engine in fund; no personal position

Long Cummins Engine in fund; no personal position

Comments

[jonreagan]

Well said...finally someone has coined a fitting term for the miserable phenomenon of "Cramerization&qu... And there are so many versions and sub-themes...how about his "80 to 120" club? Eight stocks that he annointed over the Summer, which were at or near $80; consequently, they would go to par and then on to $120! Obviously a lot of profound thought went into this theorem....

What's worse, check out the results: CAT, BA, TEX, COP, just to name a few. As a part-time investor who tries to stay current, I could have told anyone that Boeing was facing a huge risk, given the warning signs early on relative to the delivery of Dreamliner.The fact that CNBC allows this man to spout advice--in mindless formats like "The Lightning Round"---to small investors and wage-earners is fairly irresponsible, and violates standards of responsible journalism.

Pay no attention to the man behind the curtain; he doesn't know how it works. I'm sure he's a very good man, just a very bad financial advisor......