Cummins stock soars on earnings, profit outlook
What was supposed to be a sputtering, gear-grinding period for diesel-engine maker Cummins Inc. turned into a victory lap that stunned investors Friday and sent the company's stock to a record high.
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Shares rose as high as 24 percent, to $107.23, before closing at $96.14, after the company posted strong first-quarter results and raised its full-year profit forecast.
The remarkable run-up comes just a month after Cummins declared its first stock split since 1993, as the share price then soared past the $135 mark.
The stock has been one of the best performers on the New York Stock Exchange of late, climbing 30 percent since April 19, and up 77 percent in the past year.
The results represent an amazing change of fortune for the 88-year-old manufacturer based in Columbus, Ind., which has ridden a boom-and-bust cycle. Just five years ago, the company was struggling with a recession in the diesel market, and moved a heavy-duty diesel line from its flagship plant in Columbus to Jamestown, N.Y.
Despite the big run-up in its share price recently, Cummins stock is only now getting to a comparable valuation with the Standard & Poor's 500 and Dow Jones industrial average.
Prudential Equity Group analyst Igor Maryasis said he believes the shares deserve to trade at a higher value than its historical 45 percent discount to the S&P 500 in recent years.
The surge in Cummins' stock comes during what was supposed to a down year for sales of diesel engines, Cummins' best-known product, because of new EPA regulations. But its sales of generators and other products are soaring.
As a result, the company increased its profit forecast Friday, fueling the stock price. Cummins raised its guidance for full-year profit to $6 to $6.50 a share, up from previous guidance of $5.50 to $5.75 a share.
Even at the higher level, Cummins' profits would be about 8 percent below year-ago levels.
"Many people in the investment community expected us to have a down quarter as we headed into 2007 because of the predicted decline in the North American heavy-duty truck market," said Tim Solso, chief executive, on Friday.
Cummins said it earned $143 million, or $1.42 a share, during the first quarter. That represented an increase of 5.9 percent, beating Wall Street forecasts.
Bear Stearns analyst Peter Nesvold called the results a "blowout" in a research note on Friday. "Strength was across the board," he wrote.
Cummins said its shipments of global heavy-duty truck engines fell 45 percent in the first quarter. But sales of power generators reached an all-time high of $675 million, up 26 percent from a year ago, due to strong construction and infrastructure demands around the world.
The company expects that segment to grow up to 18 percent for the full year.
Still, Cummins is playing it cautious.
"There's still a lot of uncertainty in key markets for the rest of the year," Solso said.
Cummins is riding a bigger wave. Executives said they have eliminated millions of dollars in costs and are starting to see the fruits of their efforts to reshape Cummins into a more diversified, global player that is less beholden to the heavy-duty truck market.
Last year, Cummins said it would hire as many as 800 workers by 2010 for a new $250 million assembly line to make diesel engines for light-duty Dodge trucks.
"If their business continues to grow, that's great for Columbus and our workers and suppliers," said Mayor Fred Armstrong. "That's more spending power for everyone."
But as the stock climbed to new heights on Friday, some financial observers were wondering if such high levels could last.
"It's a little bit in uncharted territory for Cummins," said Mark Foster, chief investment officer at Kirr Marbach & Co. in Columbus. "The stock is not as cheap as before, but the business is in much better shape now than a few years ago."
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