What happened
Shares of engine maker Cummins (CMI 0.79%) rose a heartening 10% in January, according to data provided by S&P Global Market Intelligence. That was roughly 2 percentage points better than the S&P 500 index, which was only up around 8% in the opening month of 2019. However, that's not nearly enough to make up for Cummins' steep 24% price drop in 2018, a year in which the S&P only fell around 6%. Clearly, there's some backstory here.
So what
Cummins, which provides the giant engines that power heavy equipment like long-haul trucks, is a cyclical industrial company. This has been a big headwind lately, as sales of such trucks in North America has started to slow. That has investors worried about the company's future even though recent financial results have been pretty strong. But that's just one of the challenges Cummins is facing today.
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Another big concern is growth in a key market for Cummins: China has been experiencing an economic slowdown and is also in the middle of a trade war with the United States. After roughly 40% sales growth in that country in 2017, the company is expecting sales there to be flat in 2018. Add all of these big-picture concerns together and it's easy to see why investors have been down on the shares, with December's roughly 11% decline putting a cap on a really bad year for the stock.
Check out the latest Cummins earnings call transcript.
As investors got more upbeat about the future in January, Cummins rebounded a little more strongly than the overall market. With more willingness to take on risk on Wall Street, which makes sense after the tough year in 2018, Cummins was just making up lost ground. Here's the key, however: Nothing material has changed at Cummins. It still faces notable headwinds that are likely to spook investors again, particularly when the U.S. eventually falls into a recession. The current expansion is on the long side at this point, so that's likely to happen sooner rather than later. That said, there's little reason to doubt that financially strong Cummins (long-term debt is less than 20% of the capital structure) can work through some near-term pain.
Now what
Investor attitudes have shifted in a positive direction and that's helped boost Cummins stock. It's a welcome relief after a very tough 2018, but it doesn't change the fact that the company is facing real headwinds today in key businesses. That said, the financially strong company has been using the stock price weakness to buy shares, with the CEO specifically saying he believes the stock is undervalued. If you can step back from the recent mood shift on Wall Street, Cummins, despite its warts, could be worth a deep dive. Just don't go in expecting it to avoid another downdraft if the economy hits a soft patch.
