There wasn't a single news release or any pressing development for Cummins (NYSE:CMI) in January. Why, then, did the stock crumble 10.6% during the month, according to data from S&P Global Market Intelligence? The shares moved eerily similar to Caterpillar (NYSE:CAT), and that partly explains what made Cummins' investors jittery in January. From end-use markets to geographical exposure, the two companies have a lot in common, after all.
Global companies like Cummins bank on populous and expanding economies like China for growth, which is why any adverse geopolitical and economic developments are reflected in the share price. The recent outbreak of the coronavirus is one such event.
Cummins has substantial exposure to China. The country was the second-largest market for the engine manufacturer in 2018, accounting for 10% of its total net sales (Cummins is yet to file its 2019 annual report, so we do not have a geographical breakdown of its last year's sales). It operates its largest manufacturing joint ventures from China, including the Beijing Foton Cummins Engine Company, the Dongfeng Cummins Engine Company, and the Chongqing Cummins Engine Company.
Importantly, the company has at least five principal factories in China, with two in Wuhan, the Chinese city where the coronavirus was first identified. Cummins shares, unsurprisingly, started to weaken in January as China imposed a lockdown in Wuhan and the virus started to spread beyond the city. In late January, the company also issued a travel ban for employees going to Wuhan, according to The Republic, a newspaper in Columbus, Indiana, where Cummins has its headquarters.
Caterpillar's dismal Q4 numbers and outlook for 2020 at the end of January added fuel to the fire. Caterpillar predicts declining demand from important end-user markets, including nonresidential construction and oil and gas in North America and construction in China. Cummins CEO Tom Linebarger echoed Caterpillar's sentiments during the company's Q4 earnings call on Feb. 4 (click here to access the full transcript of Cummins' fourth-quarter earnings conference call).
Linebarger, in fact, displayed a greater sense of responsibility toward shareholders than Caterpillar's Jim Umpleby by highlighting the risks posed by coronavirus during the company's conference call in clear terms. Explaining how Cummins has "significant operations in Hubei province where Wuhan is located," Linebarger said, "It is expected that our industry as well as others will experience supply chain disruptions and loss of revenues in the first quarter due to the coronavirus outbreak."
The ongoing trade war has been a concern for Cummins anyway. So the coronavirus outbreak and concerns expressed by heavy-equipment manufacturers about lower demand in 2020 were enough to send the stock tumbling in January, particularly when trucking markets are facing a slowdown after a stupendous 2019.
Cummins projects 2020 revenue to decline in a range of 8% to 12%, driven primarily by lower truck production in North America, Europe, China, and India. ACT Research, a leading publisher of commercial vehicle data and analysis for North America, is calling for a significant downturn in the market this year.
That leaves investors with little hope for any rise in Cummins' stock price for now.