Research Articles

Cummins Inc. (CMI) Staggering Three-Year Annualized Performance? (Part 2 of 7)

Julie C - Thursday, July 28, 2011

Cummins Inc. (CMI) is best known as a manufacturer of some of the world's best diesel engines. Founded in Columbus, Indiana in 1919; as the Cummins Engine Company they built their reputation on the economy, power, reliability and durability of their engines. The following description is taken directly from their website:

“Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations.”


Today’s Cummins Inc. (CMI) supplies their engines to some of the world's leading manufacturers of trucks, tractors, automobiles and other vehicles worldwide.

Cummins Inc. is a Cyclical Stock

The following F.A.S.T. Graphs™ plots the earnings of Cummins Inc. since calendar year 1997. From this graph it is easy to see the cyclical nature of their business.

Earnings and Price Correlated F.A.S.T. Graphs™ 1997 to 2009

With our second graph we overlay monthly closing stock prices to the earnings only graph on Cummins Inc. (CMI). The correlation between long-term stock price and earnings performance is clearly evident. When earnings growth is strong, stock price reflects the good earnings results. When earnings fell in 2009 as a result of the great recession, the reaction to their stock price was severe.

Cummins Inc. (CMI) Earnings and Price Recover Post Recession

In calendar year 2010, and once again in calendar year 2011, Cummins Inc. (CMI) generated a powerful recovery in earnings, followed by a powerful advance in their stock price. Coming off of the low in 2009, earnings advanced 122% in 2010 followed by an expected 57% increase in 2011 (see chg/yr at the bottom of the graph).



The associated performance results for Cummins Inc. (CMI) post recession are extraordinary. Shareholders were rewarded with a good dividend and a staggering annualized rate of return in excess of 70% per annum.

On July 26, 2011 Cummins released the following earnings announcement:

Cummins Inc. (CMI): The Long-term Historical Perspective

The following earnings and price correlated graph puts everything into perspective. Here we can see how the falling earnings and the precipitous drop in stock price was in truth a great time to acquire this moderately cyclical company at a bargain basement price. Furthermore, even though Cummins Inc. experiences periodic bouts of cyclicality in operating results, the long-term story is about growth. The following quotes from the Berkshire Hathaway 2011 annual meeting illustrate Charlie Munger’s and Warren Buffett's views on cyclical companies:

"Charlie added that real estate is a very cyclical business, noting there is no one else right now bidding on brick companies in Alabama. Many people don’t like cyclical businesses, but at Berkshire they don’t mind lumpy business results as long as they are good businesses."

"Buffett added that See’s Candy loses money eight months out of the year, but Berkshire never worries that Christmas won’t come. With cyclical businesses, Berkshire looks at the business over the next 20 years. They recognize over that period there will be 3-4 bad years. If they can buy the cyclical business cheap enough, they will do OK over time."


It's amazing how closely long-term performance correlates to long-term earnings growth. The 14.9% earnings growth rate that Cummins Inc. generated translated into a 16.9% total return including dividends.

Cummins Inc. (CMI): The Future

Although the best time to have purchased Cummins Inc. would have been in the throes of the last recession, the current consensus estimates of leading analysts indicate that the company is very attractively priced today. However, since this company clearly experiences bouts of cyclicality, investor caution is warranted.

Watch this short video for a more detailed look at Cummins Inc.


Conclusions
The recent history for Cummins Inc. (CMI) clearly illustrates that sometimes the greatest opportunities can be found during times of crisis. This gives credence to Warren Buffett's sage advice "be greedy when others are fearful, and fearful when others are greedy."

Furthermore, stock price volatility is a fact that cannot be avoided when investing in publicly traded common stocks. On the other hand, we offer this analysis as evidence that over the longer run operating results are clearly more important than price volatility. In this vein, it's also worth considering the idea that well-established businesses, even cyclical ones, are very resilient. Therefore, maybe we should all think about Franklin D. Roosevelt advice offered in his inaugural address "the only thing we have to fear is fear itself."

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.


Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


“One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


“I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


“Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”


Recent Posts


Tags

true worth DTV COH growth stocks SCL LEN LINE PNR SWKS investing for total return GLT MHS SBRA AMCX CR VRX X DividendIncome SNH Buffett AMG WLP machinery SAM WFM value mid-cap RIMM US Economy CTG COP ODFL BIIB NSC SNI KFT HRL NLY ICLR BBY HE ENSG NPM VRTU LZB CTL DLR TEF THFF DDS FUL RAI DMRC SWK CLF KO SCHW VAL WY LTM AMP PFG DORM UEPS ECHO CanadianBanks MTZ OUTR suvivorship GPCM RDS.A BCR FairlyValued CRI FC SYK AFL,CVX,ED,JNJ,MCD,PG,SWK,T,WMT,TGT,ABM,AFL,BEN,BMS,CB,CBSH,CTBI stock FISV IPAR biotech biotechnology BCE ITC DGX BWLD COL AA AAPL ABT FCFS ADP WEC Materials MNST TSM ESRX TICC IDA AFG HCP dividendpaying fast-growing WU PB LO DRI INGR CB STE KMT MNK NKE SUBX JWN CTSH CVS BF.B value trap WBA CHD FOSL EV POT UN ABBV DECK BAX MATW PPL LOW TNGO macro HPQ value-oriented NSR BA HCBK CM dividend-growth WMT MNTX TEVA CACC RKT DRC act R dividend growth investing WRLD AZZ CERN PCLN CRLI INFY CSL JAZZ TIS INTC CLR ASNA MCD AGLP DOV utility PCL APEI RTN regional banks PNW BWP POWR AMT CMI CNC CLX,EMR OHI HAS HCI stocks MYL SIVB FAST earnings growth retirement PRAA GAS GE COO CHE SXL MSA MDP ETP SBR Challengers BPL BAC NFLX SWFT CTCM DNB DollarCostAverging NOG KCAP PAG ZUMZ fair value sell TUP MGEE dividend-paying marketvaluation BBBY WFC MRK long SU HCA CBI CAM PRGO BLK NA DIS GES food service mid-sized SYT IBM JRN DOW EE UL ITW, long-term LQDT MMM WST CASY COST LH AMGN MSCC PFE capital appreciation VFC IR P BEAV PEG GOOG GMCR CVX HIBB DOM ConsumerDiscretionary MHP best-of-breed SILVER SLGN JWML.Y XEL MA INT Dividend Champions GILD RMD HON BOKF Dividend Ideas LL IR, PNRA APD Aristocrats intrinsicvalue CHS FairValuation consumer ORCL CCK TEG: WEC: MGA cashflow DLPH ED interest rates CTBI WVR KO,CLX,CELG,JCP,GT,MSI,PEP,ED DPS PBI NVS AIG MAT SFG ECL above-average EAT highqualityR short ideas ED:SCG ATW JOY AKRX M F Aristocrat AVP UTHR STMP EXC dividend income INWK Consumer discretionary TRV investing technology Utilities Sector TGT long-term growth AFAM BG K UNM DKS FL dividend paying stocks WHR VVC SLW BMO hyper growth stocks RRD JSFT BOBE O AMZN fastgraphs MCK UTX CTRX high-yield CIO PCP MIDD ADM CXRX AB FB InformationTech blue-chip HSNI ORI MDT HII ACOM LLL T WAG OGE portfolio dividend AM stock analysis total return TWGP HRS dividendGrowth FAF utility stocks EMC due diligence MUR BEN cyclical Bond,TGT,UTX CPN ALB DELL RRC CAPE PEP DGAS DTEGY BH MKC ULTA FTR CSCO FLIC FRED DHR RSG,RTN CTAS BMTC TSCO DTE THO AZO MAIN POR HSC MNR intrinsic value,stocks,earnings,fundamentals,stock research tool,due diligence ROST Overvalued 3NSRGY FRAN MELI ENDP TE FinancialSector market timing REXX ACE CELG OHI,EPR,WPG,JLL AXP WIN InterestRates KMP AOS AFL CFR HGT JPM AIRM GT TXT DR Market Outlook CAT TAC SJM Industrial JCI URI BNS. stock research SNCR QCOM PG ACI RJF ABC GrowthOriented NROM Macro view VCO TIF DividendAristocrats GOLD TMP CKSW RY AGN UNP SRCE BLL BNS BIDU HP GPC LLY KALU CBU value investing GIS GD PRXL AEP Valuation intrinsic value PII SYNA TNC ACN MGRC cash flow OII CBRL earnings CATY MAN JKHY investing for income,growth and income ACM fair valuation PM WSM SON SHW SHOO SPLS BRLI AET BRS CSX ADT MTW RSO UNH dividends OZRK TU TGH SPY FDX Share Buybacks AEG FBHS BR CPB dividend paying THC DD RS TROW AMAG GME GEOS PNM CAH HBI ROSE ANDE HD ATHM BigFive,Canadian AAN OSIS WWW Telecommunications SO C NSRGY MCHP TWX RCII ETR IBN LKQ AFSI treasury XRX GPS JCOM free cash flow market currents TOT DVA beta PPG EK PKG APH CL BKH ITW SIG Champions HOG DividendChampions GWW CVX,SWK,MCD,TGT,PG,WMT,JNJ,MDT,AFT,T,ED Fundamentals SHR THRM LXU UHS POM HSY SEIC CGY NC BHB KR EXLS BDX PortfolioDesign SBUX BMRC suvivorship basis ACR fundamental stock research tool Contenders CNSL HNZ Yield KMB DRIP ALTE EMR, MMM KSS VMI market DE OXY banks EBAY XOM PSX VZ growth CE ETN GNTX RBC SYY ANTM economy NTES GOOGL FLO LMT V CLX AMBN long-term returns QCOR HCN FOMC FAST Graphs JNJ EPHC investing for income long-term investing REITs ARRS PDFS BMS GPI DAN CINF FTI,HTZ WMT,ROST,GIS,GE,JNJ,KO EMR OKE ABM dividends,earnings growth SHPG ACQ FDO HighQuality VTR WGL BOFI BCOR SCG OKS ESI investment MO EnergySector TGI MCY SAVE BANF healthcare DFS ONE CACI FF SoundValuation Utilities WASH AVD stock research tool MPW diversified machinery ARLP long ideas BHP AAP D NOC blue chip BAP MSFT RSG Stock Research Analysis stockResearchTool NEE EWBC ZBRA dividend growth

Archive

Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


“One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


“I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


“Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”