Cummins Inc. (CMI) designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products worldwide. It operates in four segments: Engine, Components, Power Generation, and Distribution.
CUMMINS INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. CMI, with its decline in revenue, underperformed when compared the industry average of 10.3%. Revenues dropped slightly by 4% year over year from the same quarter. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
David Johnson of Benzinga wrote an article about Morgan Stanley's outlook on the stock and in that article he says:
- Cummins is a high-quality engine OEM likely to take share. Our North American truck forecasts along with those of our international colleagues paint an underwhelming demand picture, however, and we believe CMI's growth may disappoint as a result.
So Cummins did not perform real well last quarter, and more than one analyst believes the company's underperformance will continue into 2013. For this reason I do not see a rosy forecast for the company in the near future.
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Technically Speaking
After a 4 week move up, it looks like CMI is back is a mild bearish peak and valley pattern. The stock is in a trading channel moving down and using the upper and lower Bollinger bands as support and resistance. On the recent move down, the stock also pushed through the 50 day MA and this could be significant. Other than an older positive divergence letting us know the stock will move up, the RSI has been following the stock and supporting its move. And the MACD follows right along in form. It is also supporting the bearish move of the stock. So I would conclude a mild bearish pattern in the movement of the stock right now with no signs of a turn around yet.
The Options Trade
The stock is presently trading at 95.19 and in a bearish channel. I expect it to move up close to 100 before it starts to move down again since it is presently at the bottom of the channel. For those who may wish to trade this, I would wait until it touches the upper trading channel and then look at making the following play:
When the stock touches the upper end of the channel:
- Buy a December put with a strike price of '97.50.'
- Sell a December put with a strike price of '95.00.'
Both put options should be well within the trading channel of the stock. Timing is important on this one.
Reasoning behind the Trade
- Trading with the trend.
- Analysts do not give the company a good forecast for 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
