Cummins Inc. Shares Popped 15% in February: Where Are They Headed?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis. 

What: Just when Cummins (NYSE: CMI  ) investors were getting impatient seeing the stock tumble in January after a blockbuster run-up in 2013, February put to rest all their concerns. Cummins shares zoomed 15% last month, reigniting investors' hopes after the company's fourth-quarter profits trampled Street estimates.

But it was actually a mixed set of numbers, which makes me wonder: What bid the shares up and will they keep running higher?

So what: While Cummins' Q4 revenue and net income climbed 7% each year over year, its full-year numbers left much to be desired. Revenue for 2013 was flat at around $17 billion while operating margin fell a percentage point to 12.5%, missing management's own target. Furthermore, Cummins projected its 2014 revenue to grow between 4% and 8% and operating margin to fall in the range of 12.75%-13.25%, both of which were below expectations.

Nevertheless, Wells Fargo was impressed. A day after the earnings report, Wells Fargo upgraded Cummins' stock to outperform, planting a price target range of $168-$171 a share. The shares were trading under $135 then.

The third week of February brought with it another piece of news, or rather two, which pushed investors' optimism to an all-new level. President Obama announced plans to develop new fuel-economy standards for medium- and heavy-duty trucks within the next two years. Cummins came out in full support of the decision. And why not: The "SuperTruck" that it's building with PACCAR was on display at the event where the president made the announcement. In test runs against a 2009 truck, the SuperTruck gave 75% higher fuel economy and 43% lower greenhouse-gas emissions. A couple of days later, Deutsche Bank upped its price target on Cummins to $170 a share. And Cummins stock hit its 52-week high.

Now what: Investors, and analysts, have valid reasons to remain bullish on Cummins. The leading engine maker aims to dominate an incredible 70% of the medium-duty and 39% of the heavy-duty North American truck markets by the end of this year. That market-share gain should ensure a growing top line for the company. Its margins are anyway among the best in the industry, and the company has committed to returning 50% of its operating cash flow to shareholders. That could mean greater dividends on the horizon. The company boosted its dividend by 25% last year.

In fact, so high is the level of interest in Cummins stock that the market even overlooked the fact that Cummins is recalling more than 25,000 engines on reports of fire in two cases. Here's what you should know: The recall includes the hyped Cummins-Westport 12-liter ISX 12G engines that were just launched last year and which both companies, Cummins and Westport Innovations, are heavily betting on. Though the financial implications of the recall are unknown yet, I'm going to keep a close watch on any updates.

But if the market could ignore those recalls, it will probably need something big if it were to step back on Cummins stock. With things appearing good so far, it looks like Cummins shares will continue to trend higher this month.

Don't think Cummins shares have much upside left? Consider this stock instead
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. Find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2866533, ~/Articles/ArticleHandler.aspx, 12/22/2014 3:38:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement