For the second time this year, U.S. engine maker Cummins (CMI) lowered its 2012 forecast. What are its reasons for doing this? It says that customers are just not spending because of the weakening global economy. Now the company is expecting sales to reach $17 billion, a full $1 billion less than it anticipated after the last adjustment. Cummins Chairman and CEO Tom Linebarger said:
We continued to see weak economic data in a number of regions during the third quarter, increasing the level of uncertainty regarding the direction of the global economy. As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products.
Two markets in particular have been affected: the North American heavy truck market and the international power generation markets.
Clarcor (CLC) is a company that competes with Cummins in the heavy duty, original equipment manufacturer filtration sector. It also has reported declining revenue for the third quarter because of lower-than-expected revenue. Clarcor's President and CEO Chris Conway explains why:
Our third-quarter financial results were below our internal expectations heading into the quarter primarily due to lower than expected sales of heavy-duty engine filtration products in the domestic aftermarket and China.
And just like Cummins, Clarcor also lowered its full-year earnings guidance. For this reason, Cummins is still in a contraction phase, and 1,500 jobs are going to be cut by year-end. There may also be work-week reductions and some plant shutdowns if the need arises. Since the company is still retracting, I would expect the present trend to continue.
Click to enlarge image.
After an attempt at a rebound during mid-summer, it appears as if Cummins is continuing its downtrend. There was a point when a positive divergence identified an uptrend, but that trend was short-lived. This present downtrend is supported by the RSI and the MACD. Both are bearish following the trend and give no indication of any movement otherwise.
The Options Trade
The stock is presently trading at $87.79. Since the outlook is not favorable for the stock, and it is presently trading in a bearish trend, I will look at a short-term income strategy trading with the trend.
- Buy the January 2013 put with a strike of "87.50" (priced at $6.00)
- Sell the January 2013 put with a strike of "85.00" (priced at $4.70)
- Net Debit to Start: $1.30
- Maximum Profit: $1.20
- Maximum Risk: net debit
- Maximum Length of Trade: four months
Reasoning Behind the Trade
- World economy contraction will not favor the stock.
- This second downsizing of forecast income does not say bullish run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.