Cummins' Mysterious Rise

I have no idea why Cummins Engine (CMI) was up 14% yesterday morning to the $72s; I do see a news event involving Caterpillar (CAT), and Navistar but fail to see a direct connection - I could be missing the forest for the trees. Either way I am going to use this opportunity to cut back my position from a 1.6% stake to 0.6% (I actually bought some yesterday as it spiked downward to its 50 day moving average, but not enough of a stake to mention, so sort of lucked out on those shares)

If anyone can decipher why that news is good for Cummins or if there is something else going on behind the scenes with this name, feel free to add a comment. We'll buy back on future pullbacks.

[Apr 30: Cummins Engine Excellent Report on Strong International Sales]

Investors Business Daily has a nice writeup as of last Friday as well... myself, I just love how far advanced they are in the developing world... I call this type of company a stealth international but its still considered a "U.S. company".

• The ongoing trend toward making things more earth-friendly doesn't leave out diesel engines. Stricter emission standards for diesels are hitting the U.S. and other countries.
• Engine maker Cummins (NYSE:CMI - News) knows how to control emissions, so it's thriving in this regulatory environment, according to some analysts.
• "It's not that they are unique and nobody else can do it," said Eli Lustgarten, an analyst at Longbow Research. "But they have really developed a more systematic approach and have been able to deliver products faster that meet the new standards."
• A Cummins spokesman points out that the company is unique in being the largest diesel engine manufacturer that doesn't produce vehicles. Mark Land, the spokesman, says this lets Cummins concentrate on engines and emission standards.
• In addition to growth tied to industry-leading technology, analysts expect big gains from the company's exposure to emerging markets. Columbus, Ind.-based Cummins has formed joint ventures or other partnerships with large automakers in these markets, including Tata (NYSE:TTM - News) in India, Dongfeng and Foton in China, and Kamaz in Russia.
• This international exposure is helping the company weather the recent U.S. slowdown, according to Brian Rayle, an analyst at FTN Midwest.
• Other analysts say few companies can top Cummins' worldwide reach. Credit Suisse analysts said in a recent note that Cummins is one of the best ways to "play the global infrastructure cycle." Credit Suisse does investment banking work for the engine maker.
• International sales became the majority of Cummins' total sales for the first time in 2005. Last year, about 54% of the company's $13 billion in revenue came from outside the U.S. About 19% of 2007 sales came from Asia and Australia, with 18% from Europe and Russia, 9% from Latin America, and 5% from Africa and the Middle East.
• Despite the U.S. weakness, Cummins says it increased its market share in the North American heavy- and medium-duty truck markets.
• "One longer-term concern is the fact that on the heavy truck side in North America and globally, you are going toward a more vertically integrated structure," said Rayle, the FTN Midwest analyst. "More of the truck manufacturers are building their own engines."
• "The biggest challenge is execution for the company. The company has positioned itself with lots of opportunity from the new products, but that involves a dramatic increase in capital spending for the next five years," Lustgarten said.
• Cummins expects that high gas prices and environmental concerns will help increase demand in the U.S. for light-duty diesel engines, which are about 30% more fuel efficient than gasoline engines.

Disclosure: Long Cummins Engine in fund; no personal position

Comments

[Gajonka:]

Could be a BUYER out there!! Cummins has grrrreat margins. Not sure why you are selling?!?!?!?!?!?!

2008 Jun 13 07:59 AM

[AdamB:]

I haven't followed Cummins (though I do follow your comments!), but CAT announced that they are exiting their diesel engine business for on-highway trucks.

"Caterpillar Inc., in a significant strategic retreat, said Thursday that it would stop manufacturing heavy-duty truck engines for the U.S. market in 2010.

Even as the Peoria-based maker of earthmoving and other construction equipment was announcing its withdrawal from the domestic market for "on-highway" truck engines, however, Caterpillar and Warrenville-based truckmaker Navistar International Corp. unveiled a tentative alliance that will provide Caterpillar with an ongoing presence in the truck business." - Chicago Tribune

2008 Jun 13 08:06 AM

[truck geek:]

The heavy duty truck industry is consolidating vertically. Cummins and Caterpillar were the last two independent engine manufacturers in North America. With Caterpillar pulling out of the market, Cummins stands to pick up a significant amount of volume.

2008 Jun 13 08:14 AM

[Heatseeker:]

Cummins is up 10%+ because Caterpillar essentially gave them a potential 9-10% sales increase in the truck engine market by exiting the on-highway category of heavy trucks. The Cat deal with Navistar is for production of off-highway heavy construction vehicles only.

2008 Jun 13 08:20 AM

[Seemer:]

If you can't decipher why that news is good for Cummins, you should find another line of work. If someone told you that Coke would stop selling cola, could you decipher why that would be good for Pepsi.

2008 Jun 13 09:29 AM

[TraderMark:]

Thanks Heatseeker, I didn't make the distinction there. Makes sense from a long term perspective.

2008 Jun 13 09:29 AM

[TraderMark:]

Thanks Seemer

I wrote that piece yesterday about 5 minutes after the news came out. With the myriad of articles written since it's a lot easier to Monday Morning QB. Somehow I guess I got lucky to actually own the stock, being as pathetic as I am.

2008 Jun 13 10:18 AM

[Mark Anthony:]

You need to read this. This is the sort of super spike you do not get to see very often:

tinyurl.com/3ek6gp

Things happened a few hours later just as I predicted:
www.kitco.com/charts/l...

We are on an early stage of a supernova eruption.

2008 Jun 13 10:35 AM

[ecap1952:]

If you followed the on-highway truck market you would understand the rise in Cummins. People still think that Cummins makes a lot of money from selling engines to On-Highway truck manufacturers like PACCAR (Keworth and Peterbilt),Volvo (Volvo and Mack), Daimler (Feightliner, Western Star...) and Navistar. They don't. If you look at the worldwide diversification out of the on-highway market over the last few years that Cummins has been doing, you would understand that they know that they make a whole lot more money per engine on other markets, like electric power and stationary engines.

They have diversified, because like Cat, they see the truck manufactures listed above are putting their own engines in their trucks. PACCAR is building a $300M plant in the southern US to build an engine for DAF (a European truck/engine company that PACCAR owns), Daimler is putting Detroit Diesel (which they own) and Mercedes engines in their product. Volvo is puts their own engines in the Mack and Volvo trucks. Navistar is putting in jointly developed MAN/Navistar engine in their trucks.

Cummins and Cat are the secondary engine suppliers to all these companies. With Cat choosing not to provide EPA2010 engines, the market thinks that this was a great windfall for Cummins. Yes, they will get some small increase to production, but the effect to the bottom line profit did not justify the 14% stock increase yesterday.

Next time do your homework before you blog and I have to do it for you.

2008 Jun 13 01:20 PM

[lefty:]

All of you forgot to look at the Cummings/westport projects.

2008 Jun 14 06:38 AM

[richmo:]

Cummins is a tightly managed company that plays their cards very close to the chest. I was lucky, upside down on 200 shares last week, and cashed quickly. CMI a great play for short term trading.
Few know that CMI divested itself of it's marine engine division to Brunswick, the boat builder with Sea Ray, and probably 9 other brands. Point is pure profit.
Everyone seems to forget that Navistar has contract with FORD in the mfr. of Ford's 6.4 PSD diesel engine. Ford to allegedly offer it's own engine in 2010; without 2010 compliance verification as of this date?
Say 100,000 diesel engines(Ford super duty trucks) @ $6,000. in Navistar sale to FORD--gone. FORD with unproven to be released engine? Navistar kisses Caterpillar and gives Navistar additional class 8 engine manufacture along with class 3 & 4.
Oh, yes, now if the stew is not thick enough, dear old Chrysler, owned by private equity, manufactures DODGE.
Cummins market capitalization at 72./share a lowly 14.7 billion $. I am not trying to publish the book as it is too complicated, but my bet is that Cummins and Dodge will be brothers before 2010.
And the answer is simple, the profit motive.
Cummins didn't have the stomach for all the marine law suits; and Navistar is tired of the lawsuits with Ford.
And the profit motive, and let's not talk about the number of engines going to CHINA...

2008 Jun 14 10:13 AM

[Cicero:]

Ecap and Seemer, you folks need to lighten up a tad. All of the rest of us who can't math your unblemsihed records of never missing an otherwise obvious connection feel human enough without having to worry that you are hovering over a keypad waiting to sling a poisoned barb.

2008 Jun 15 07:53 AM

[dieselralph:]

Also DTNA (Freightliner) just announced CMI is their exclusive non-proprietary engine for 2010 and will also start selling them in January on the class 8, displacing Cat de facto from here on out. Nav-Int class 8 is 90%+ CMI engine (Wards April data) . The vertical integration thing won't happen there for a while. Also Nav-Int announced CMI is exclusive big bore 15L and up engine supplier after 2010. Ford booted out Nav-Int 6.4L engine in the F-650/750 range years ago and CMI is the base engine. Yes, you can buy a CMI in a Ford. CMI also announced a diesel in Chrysler half ton p/u and Nissan p/u as well in 2009/10. Prolly in their large SUV as well.

2008 Jun 16 07:58 PM

[diesel_news...:]

Maybe you missed the following annoncements:
1. That Cummins and Navistar signed long-term agreement
2. That Cummins engines will be offered in Freightliner and other Daimler trucks.
3. Announcement, made by Daimler Truck of North America: beginning in 2010 Cummins will become Daimler’s exclusive, non-proprietary partner across the full range of heavy and medium-duty engines in Freightliner, Sterling, Western Star trucks and Thomas Built Buses.
4. That Cummins and Volvo: extended there supply agreement for the ISX in Volvo VN trucks. .
5. That Cummins and PACCAR: Announced agreement to be the exclusive supplier of PACCAR’s mid-range engines, and heavy-duty market share with PACCAR has grown to capture almost 70 percent of Kenworth and Peterbilt trucks.

Maybe you sleep through the news releases?

2008 Jun 18 02:12 PM