Streetwise for Sunday, August 27, 2016 :

With the recent downturn of the equity markets, this could be a good time to add to your holdings. After all, doesn’t it make sense to shop during a sale.

One stock that might be an intriguing research choice is Cummins, Inc. (CMI). Cummins is one of the leading worldwide manufacturers of diesel engines. The company’s 2017 earnings estimate has been revised upward by $0.41 per share in the past three months.

Third quarter earnings estimates are up from $2.14 per share to $2.39, while current year consensus estimates have been increased to between $9.39 and $9.68 per share.

For second quarter, the company reported earnings of $424 million or $2.53 per share as compared to $406 million, or $2.40 per share for the same quarter a year ago. Unfortunately, that number did not meet the Street’s consensus of $2.58 per share. However, revenues came in at $5.08 billion, as compared to a consensus of $4.79 billion.

Based on the current guidance, Cummins expects full year 2017 revenues to increase between 9 and 11 percent. Full year earnings before interest and taxes (EBIT) is expected to be 11.75 to 12.5 percent of sales, unchanged from prior guidance.

According to Power Systems Research, the diesel engine market will likely see sales increase by 7.7 percent this year to $250 billion. A current forecast has the manufacturers of the diesel engines increasing their production to 21.2 million units by 2021, a compounded annual growth rate of 3 percent.

If the current administration’s infrastructure projects take place, it will increase demand for road construction vehicles and domestic sales are Cummins largest market. Furthermore, the projects, if they come about, will emphasize, “Buy American.”

The diesel engine industry does face an increasing threat from electric vehicles. Yet, the risk is currently minimal. Startups like Nikola Motor Company that manufacturer of electric semi-trucks have not exactly disrupted the market. One reason is that Nikola’s trucks cost more than $300,000 per vehicle.

Besides that, around 30 percent of costs in the trucking industry are for fuel, which is correlated with the price of oil. And with the declining price of oil, the demand for traditional diesel trucks has increased.

Cummins trailing 12-month (TTM) market multiple or price-to-earnings ratio (P/E) is 17.54 and could grow more than 20 percent. Gross margins narrowed from 26.46 percent to 24.58 percent compared to the same period last year, while operating margins or earnings before interest, taxes, depreciation and amortization, (EBITDA) decreased to 12.25 percent from 14.36 percent.

Year-on-year change in operating cash flow of a negative 5.10 percent is about the same as the change in earnings with no significant movement in accruals or reserves. Earnings rose compared to same period last year, despite decline in operating and pretax margins.

Cummins has a strong dividend policy with a current yield of 2.84 percent in comparison with the industry’s average of 2.38 percent, and a payout ratio of 44.2 percent. The company has been raising dividends for 11 years. This is a positive if you are interested in taking long-term positions in companies with the growing yield and strong fundamentals.

The company’s shares are up 23 percent since the beginning of the year, while the Standard & Poor’s 500 index has increased 10 percent. The stock has climbed 37 percent in the last 12 months.

The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $172 per share. My earnings estimate for this fiscal year is $9.65 per share with a 12-month projected share price of $168, yielding a 10 percent capital gain, plus the 2.84 percent indicated dividend.

Note to Readers: I will again be teaching two courses for Ringling College’s Lifelong Learning Academy – Introductory Investment Analysis and Portfolio Management. Classes start September 25 and run every Monday for 8 weeks. Registration begins August 29. Call 941-309-5111 or go to www.RCLLA.org. Classes fill quickly!

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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