Cummins Inc. (CMI) Staggering Three-Year Annualized Performance? (Part 2 of 7)

By: Chuck Carnevale | Thu, Jul 28, 2011
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Cummins Inc. (CMI) is best known as a manufacturer of some of the world's best diesel engines. Founded in Columbus, Indiana in 1919; as the Cummins Engine Company they built their reputation on the economy, power, reliability and durability of their engines. The following description is taken directly from their website:

"Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations."

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Today's Cummins Inc. (CMI) supplies their engines to some of the world's leading manufacturers of trucks, tractors, automobiles and other vehicles worldwide.

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Cummins Inc. is a Cyclical Stock

The following F.A.S.T. Graphs™ plots the earnings of Cummins Inc. since calendar year 1997. From this graph it is easy to see the cyclical nature of their business.

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Earnings and Price Correlated F.A.S.T. Graphs™ 1997 to 2009

With our second graph we overlay monthly closing stock prices to the earnings only graph on Cummins Inc. (CMI). The correlation between long-term stock price and earnings performance is clearly evident. When earnings growth is strong, stock price reflects the good earnings results. When earnings fell in 2009 as a result of the great recession, the reaction to their stock price was severe.

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Cummins Inc. (CMI) Earnings and Price Recover Post Recession

In calendar year 2010, and once again in calendar year 2011, Cummins Inc. (CMI) generated a powerful recovery in earnings, followed by a powerful advance in their stock price. Coming off of the low in 2009, earnings advanced 122% in 2010 followed by an expected 57% increase in 2011 (see chg/yr at the bottom of the graph).

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The associated performance results for Cummins Inc. (CMI) post recession are extraordinary. Shareholders were rewarded with a good dividend and a staggering annualized rate of return in excess of 70% per annum.

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On July 26, 2011 Cummins released the following earnings announcement:

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Cummins Inc. (CMI): The Long-term Historical Perspective

The following earnings and price correlated graph puts everything into perspective. Here we can see how the falling earnings and the precipitous drop in stock price was in truth a great time to acquire this moderately cyclical company at a bargain basement price. Furthermore, even though Cummins Inc. experiences periodic bouts of cyclicality in operating results, the long-term story is about growth. The following quotes from the Berkshire Hathaway 2011 annual meeting illustrate Charlie Munger's and Warren Buffett's views on cyclical companies:

"Charlie added that real estate is a very cyclical business, noting there is no one else right now bidding on brick companies in Alabama. Many people don't like cyclical businesses, but at Berkshire they don't mind lumpy business results as long as they are good businesses.

Buffett added that See's Candy loses money eight months out of the year, but Berkshire never worries that Christmas won't come. With cyclical businesses, Berkshire looks at the business over the next 20 years. They recognize over that period there will be 3-4 bad years. If they can buy the cyclical business cheap enough, they will do OK over time."

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It's amazing how closely long-term performance correlates to long-term earnings growth. The 14.9% earnings growth rate that Cummins Inc. generated translated into a 16.9% total return including dividends.

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Cummins Inc. (CMI): The Future

Although the best time to have purchased Cummins Inc. would have been in the throes of the last recession, the current consensus estimates of leading analysts indicate that the company is very attractively priced today. However, since this company clearly experiences bouts of cyclicality, investor caution is warranted.

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Watch this short video for a more detailed look at Cummins Inc.


Conclusions

The recent history for Cummins Inc. (CMI) clearly illustrates that sometimes the greatest opportunities can be found during times of crisis. This gives credence to Warren Buffett's sage advice "be greedy when others are fearful, and fearful when others are greedy."

Furthermore, stock price volatility is a fact that cannot be avoided when investing in publicly traded common stocks. On the other hand, we offer this analysis as evidence that over the longer run operating results are clearly more important than price volatility. In this vein, it's also worth considering the idea that well-established businesses, even cyclical ones, are very resilient. Therefore, maybe we should all think about Franklin D. Roosevelt advice offered in his inaugural address "the only thing we have to fear is fear itself."

 


 

Chuck Carnevale

Author: Chuck Carnevale

Chuck Carnevale
F.A.S.T. Graphs™

Chuck Carnevale

Charles (Chuck) C. Carnevale is the creator of F.A.S.T. Graphs™. Chuck is also co-founder of an investment management firm. He has been working in the securities industry since 1970: he has been a partner with a private NYSE member firm, the President of a NASD firm, Vice President and Regional Marketing Director for a major AMEX listed company, and an Associate Vice President and Investment Consulting Services Coordinator for a major NYSE member firm.

Prior to forming his own investment firm, he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck is a sought-after public speaker who is very passionate about spreading the critical message of prudence in money management. Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

Copyright © 2011-2014 Chuck Carnevale

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/