Stock Alert: This One Deserves Your Immediate Attention

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With some of the industries’ top names ready to suit up with their numbers next week, you could have a hard time keeping up with all of them. But that’s no excuse to not prepare yourself. The impact of surprises or shocks could be easily mitigated if you know what to expect.

Cummins (NYSE: CMI) is one such company you should watch closely over the next couple of days, not just for numbers but for reasons that could affect every investor, even a non-Cummins one.

Contain your excitement

Cummins drilled a hole in investors’ optimism last time when it said it will reduce inventory and cut back production further during its fourth quarter like it did in the third. Cummins even laid out a massive cost-cutting plan that included handing over pink slips to 1,000 to 1,500 employees by year end. Interestingly, this was in contrast to PACCAR’s (NASDAQ: PCAR) intentions of raising output by around 2% during its fourth quarter. PACCAR’s numbers are already out, and though it hasn’t mentioned a specific output figure, the company’s truck deliveries came in 2% higher sequentially.  PACCAR’s optimism probably stems from the way it is gaining market share despite sluggishness – in the critical Class 8 truck segment in the U.S. and Canada, PACCAR closed 2012 with a record 29% share.  

Higher deliveries from PACCAR could raise the bar of expectations from Cummins simply because the former is also its largest customer. But it need not necessarily mean that PACCAR also placed more orders with Cummins. In fact, PACCAR sees softness persisting in the industry and expects its next quarter deliveries to be lower by low single digits.

Little wonder, then, that analysts see Cummins’ fourth-quarter top line slip nearly 18% and earnings per share dip 31%. Ouch, isn’t that being a bit too pessimistic? Is the truck market indeed in such bad shape? Well, the answer could lie abroad.

Same story everywhere

You see, 60% of Cummins’ revenue comes from international markets, out of which 15% revolves around the still-struggling European region. Unfortunately, going by recent statements from peers, that’s hardly something to get excited about.

Caterpillar (NYSE: CAT) expects “growth in the eurozone to struggle to match 2012” this year, and will lower production in China till excess inventory is sucked up. Cat’s construction business sales from the Asia-Pacific region slumped a whopping 32% in its last quarter, while that from Europe, Africa, and Middle East dried up by 28% from the comparable period last year. PACCAR doesn’t provide a detailed break up of regional revenue, though sales from Europe were down 17% last quarter.

It’s equally bad in India, which is home to Cummins’ 50:50 joint venture with the nation’s leading truck maker Tata Motors (NYSE: TTM). Cummins’ forecast of volumes at the venture dropping 13% for 2012 could hold water if the latest numbers from Tata are anything to go by. Between April and December last year, Tata Motors’ truck sales dipped a substantial 28%, even compelling it to lock production for some weeks.

In short, you better brace up for bad numbers from Cummins.

My mind’s on gas

But frankly, I’m not as eager to know how Cummins fared in the last quarter as to what plans it has for 2013, especially when the conversation stops at the topic of town, natural gas. 

Cummins is about to push one of its most advanced and important engines ISX 12G into full production this year. It is yet another offering from the house of Cummins-Westport, the long-standing tie-up between Cummins and Westport Innovations (NASDAQ: WPRT), but it is one of the most advanced products till date. So much so that Westport hopes to see as many as 16 new truck models from various makers opting for the engine this year. PACCAR has already chosen them for its ‘next-generation’ truck models.

Obama’s re-election has put the spotlight back on natural gas, and that is exactly why I am excited about Cummins’ earnings release. PACCAR sounded low when it tagged natural gas as ‘a pretty small factor’ as of now, and admitted how not much can be done unless infrastructure builds out to support the alternative fuel. I am just waiting to hear Cummins.

What you should wait for…

That leaves you with four great reasons to not miss Cummins’ earnings release this week:

  1. Cummins’ numbers help you gauge the health of the North American trucking industry as 50% of its engines are sold to this market. As the industry itself reflects the shape of things in the economy, every prudent investor should know what’s brewing in there.
     
  2. No Westport Innovations’ investor can afford to miss Cummins’ numbers, and vice-versa. Remember how Westport’s shares tanked the day Cummins announced its own 15-liter natural-gas engines last year? Yeah, you got my point.
     
  3. Cummins could give you great fodder for your favorite brunch conversation: natural gas. Need I say more?
     
  4. Of course, as a Cummins investor, don’t you want to know what path your company will tread in 2013?

Psst…I didn’t mention Cummins’ fourth-quarter performance as a reason above, because my sixth sense tells me it won’t be good.  Stay tuned as I dissect Cummins’ earnings release for you. Just click here to add Cummins to your stock watchlist.


Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends Cummins, Paccar, and Westport Innovations. The Motley Fool owns shares of Cummins, Paccar, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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