Cummins is Down but Watch for a Rebound
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Trading at a 52 week high of 128.60, Cummins (NYSE: CMI) back-tracked from that point on. As we look at the company, there are understandable reasons for this pullback. It will not continue through the whole year though, we expect it to turn up before the years end.
The problem begins with Cummins overseas market. At this point, most people are aware of the fact that China has been announcing for a couple weeks now how it is re-estimating its growth for the year. Originally 8.9%, it was revised downward to 7.5%. There is weakening among the mining and construction sectors. This in turn reduces the demand for heavy trucks.
This will stifle the company’s upward journey temporarily. The fact that it recently hit an all time high and has regressed since then is also a factor in this present move. If an investor looks at the RSI indicator, a negative divergence can be seen occurring from the first of February 2012 until it peaked. This was a sign that the trend was weakening and a possible turn down was in its future. We got that!
Cummins is not the only company to struggle as of late. Navistar (NYSE: NAV) is a competitor with Cummins. It missed first quarter estimates in March. It has lost 20% in value since February for a number of reasons. The first quarter is always the weakest for this company. But a number of events contributed to the losses it has dealt with:
- Higher year-over-year healthcare costs
- The start up of a new foundry operation
- A brake supplier issue that interrupted truck shipments
- The temporary shutdown of a key OEM customer of its South America operations due to theThailandfloods
- Navistar is in worse shape than Cummins presently and is not expected to grow this year, but rebound very well in 2013.
Cummins is not waiting for 2013 to rebound! It won’t stay down in 2012, we expect the stock to turn sometime before the year is over. To offset the slow down in China, the U.S.economy has slowly been improving. The North American truck market has steadily been improving. Cummins is will deliver up to 2 percent fuel economy improvement over today’s products starting in 2013, so its reputable brand name continues to be at the forefront of heavy engine efficiency. This is very important as our fuel prices continue to climb.
The company is expected to grow by 14.40% in 2012 and another 13% in 2013 as the economy picks up.
We find very strong support around 102 so we do not expect the stock to drop much farther than that—if it gets there. It would be a good point to buy some stock for a long term hold.
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