One of our favorite names - Cummins (CMI) had a monster 2010, up about 140%, tacking on some $10B+ of market capitalization. This is one of the many U.S. companies increasingly only in name with the majority of revenue coming from overseas. Cummins represents the quandry facing investors in 2011... or at least some point in 2011 when the current euphoria wears off. Where to put your money for outsized gains? Perhaps Cummins has another 25% type of year in it - or perhaps it is being priced for perfection and prone to a blow up in the year ahead as some earnings report disappoints the new crowd of speculators who have piled into the name. Indeed, last quarter the company missed on both the top and bottom line but since we are in the David Tepper market where no one loses anymore as The Bernank says the market must go up - it did not matter.
Earnings are slated to jump from $5.00 for year end 2010 (soon to be reported) to $7.00 in year end 2011. That's a forward PE of 16, using earnings a full year out from now - for what is an industrial cyclical - albeit one with some fantastic secular underpinnings. Further with commodity inflation we have to begin to model the same problems we had in 2008 - when input prices (i.e. steel) began to surge, profit margins were punched in the gut across industry. [May 14, 2008: Deere Earnings - Why I'm Avoiding Equipment Stocks] [May 17, 2008: WSJ - Fast Rising Steel Prices Set Back Big Projects] If speculators continue to push commodities up at current pace, we're going to start seeing some tremendous headwinds in late 2011 - a mirror of what happened in 08. So while the market certainly can continue upward in the year ahead, it is going to be difficult for the exact same names that have been market leaders the past 2 years to continue to carry the baton - or at least to expect level of performance similar to what we've seen.
The CEO for Cummins made a quick appearance on CNBC Fast Money Friday. See below.
Some highlights from the crew:
- The maker of diesel engines, fuel systems and emission controls based in Columbus, Indiana benefited from an expansion into overseas markets such as China and India, powering trucks carrying everything from grain to iron ore to people.
- “Global economic strength, a replenishment cycle of old trucks and some production capacity taking out during the recession are driving the gains,” said Karen Finerman, President of hedge fund Metropolitan Capital Advisors and owner of Cummins shares.
- ... governments around the world.... implementing emission standards that would require the purchase of efficient engines made by companies like Cummins.
- In the third quarter, sales in non-U.S. markets jumped by 56 percent and accounted for about 60 percent of total revenue. Providing engines to power medium-duty trucks and buses in Brazil were a particular highlight. The company, located about 1 hour south of Indianapolis, has customers in 190 countries.
- In October, the company raised its 2010 sales forecast to $13 billion, which would be an increase of 11 percent from 10.8 billion in annual revenue last year.
- Analyst sentiment has cooled slightly a bit on the name after the big gains this year. Nine analysts rate it a “buy” and nine call it a “hold” or “underperform.” The average 12-month price target of Wall Street is $107.67, which would represent an almost 7.7 percent return in 2011, not including the dividend.