Update Cummins (CMI)

All those warnings about weakness in the fourth quarter are starting to sound like a pattern. At least I starting to see investors and analysts leap to work building a pattern.

Be careful, though, the warnings are coming from very different directions, which should make it hard to draw larger conclusions about market sectors and the global economy.

Let’s take the October 25 poster child for fourth quarter warnings, Cummins (CMI). (Cummins is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/)

That day Cummins announced third quarter earnings of $2.35 a share, beating the Wall Street consensus by 11 cents a share. Read more

Let’s say this rally runs for a while—like maybe right into earnings season. What about a good buy or two? (I wouldn’t recommend getting giddy here, though. Remember that the August 31 high on the Standard & Poor’s 500 is 1219 and the July high is 1344. This market is in a trading range in my opinion until it demonstrates otherwise, though there is a question of where the top is, 1219 or 1344. The bottom seems pretty clear at 1120.)

You can go for stocks in the crushed commodities sector such as Freeport McMoRan Copper & Gold (FCX), which I recommended on September 23 http://jubakpicks.com/2011/09/26/update-freeport-mcmoran-copper-gold-fcx-3/ .

You can add shares of crushed industrials such as Johnson Controls (JCI). (This stock, like Freeport McMoRan is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Both stocks are obviously very responsive to news that suggests the euro debt crisis might not take down the global economy. Freeport McMoRan was up 5.9% yesterday morning and Johnson Controls 6.2% in the big “euro-crisis-is-over” rally.

But both stocks are also still way—and, I mean, way—off their 52-week highs. Freeport McMoRan is trading at $33.31 today when its 52-week high is $60.75. Johnson Controls is at $27.56 when its 52-week high is $42.92.

But I’d like to suggest a third category of shares that’s worth a look especially if this rally extends until the start of earnings season on October 11. (Alcoa (AA) reports that day and the company’s earnings announcement marks the unofficial start of earnings season.)

And that’s crushed technology stocks. Stocks in the sector dropped along with everything else in the recent market plunge. Third and fourth quarter earnings are historically the strongest for technology stocks. And at recent valuations, I think earnings season could give them a lot of momentum, making them a good alternative for investors who might be overweight commodities or industries.

What technology stocks? Besides those in my September 20 post http://jubakpicks.com/2011/09/20/the-neglected-technology-sector-looks-like-a-good-candidate-for-an-end-of-the-year-rally/ take a look at F5 Networks (FFIV). Read more

Update Freeport McMoRan Copper & Gold (FCX)

In the short-term everything looks terrible for Freeport McMoRan Copper & Gold (FCX), a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . Copper prices hit a new low for 2011 of $3.28 a pound on Friday, September 9. The HSBC/Markit Economics China Manufacturing Purchase Managers Index fell to 49.4 in September from 49.9 in August, signaling that China’s manufacturing sector, a big user of copper, had started to contract. (On this survey the 50 level marks the difference between contraction (below 50) and expansion.) Strikes have hit the company’s big Grasberg mine. The union originally said it planned on a month-long strike to force the company to pay higher wages, but now says that the work stoppage could go on for longer.

In the long-term, though, the picture looks totally different. Long-term copper demand continues to outstrip additions to industry supply. Codelco, the state-owned Chilean company that is the largest copper producer in the world, said on September 3 that “the global copper market is headed for its biggest deficit since 2004 as suppliers fail to keep pace with demand led by China.”

Investors, afraid that they’re about to see a replay of 2008 when copper and other commodity prices collapsed and shares of Freeport McMoRan fell to $8.40 in December from $56 in June, pushed the price of these shares to $32.55 at Friday’s close from $56 at the end of July.

I can’t tell you that this is as low as the stock will go. (It’s up today, September 26, by 1.8% as of 2:15 p.m. New York time.) Fear that the European debt crisis will slow global growth, that the U.S. economy will slip back into recession, and that China’s growth engine will slow significantly will keep pressure on copper prices in the near term. Copper could move lower and gold, well, gold is selling off as traders liquidate positions to meet margin calls from their brokers.

But I can tell you that the stock is now cheap on the fundamentals. For example, Jefferies just cut its estimate for 2011 earnings per share to $5.30 from $5.66. At that lowered estimate the stock traded Friday at a price to earnings multiple of 6.1. The mid-point of the stock’s price-to-earnings range over the last 10 years is 10.4, Standard & Poor’s calculates. At that mid-range P/E ratio, Freeport McMoRan would sell for $55 a share, almost 70% above Friday’s close of $32.55.

And this is a company with a lot sounder fundamentals today than it had in 2008. Long-term debt, for example, was $9.2 billion at the end of 2008 but was just $4.7 billion at the end of 2010. Free cash flow was $5.5 billion for the trailing 12-months.

I think the current price of $32 is a reasonable place—even with today’s risk—to begin building or to add to positions. Keep some powder dry so that you can add shares if this bargain becomes even more of a bargain. But adding a position or adding to a position (since the stock is already a member of my Jubak’s Picks portfolio) in Freeport McMoRan to a portfolio at $32 a share strikes me as a good long-term bet. As of today September 26, I’m lowering my target price of $55 a share by June 2012 from the current $75 a share by July 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper and Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Sell Aixtron (AIXG)

Quite a change from Aixtron’s last guidance back on July 28.

At that time Aixtron (AIXG), a leading maker of equipment to manufacture LEDs, said that although it believed that the choppy waters of the second quarter were likely to continue in the third quarter, the company remained optimistic about achieving its original targets for the full year.

On September 15, however, just two weeks before that choppy third quarter will close, the company cut its revenue and earnings guidance significantly for 2011. Customers are delaying orders and Aixtron sees revenue it counted on for 2011 shifting into 2012. To be prudent the company also decided to take $140 million out of its order backlog to account for the chance that customers will cancel orders completely.

The guidance didn’t amount to throwing in the towel but it is recognition that the global slowdown isn’t just choppy waters. I don’t think this is worse than Wall Street and investors were expecting—and you can make an argument that the stock is now fairly valued.

You could but I won’t here. Investors don’t know, and can’t know, that this is the worst that it will get. And while I think the shares now trade at a very attractive price if Aixtron’s forecast holds, I won’t put any weight in that forecast until I see if the third quarter—scheduled for reporting on October 27—shows that the situation is no worse than Aixtron’s management thought just two weeks before the end of the quarter.

The new guidance is a big step down from the former projections. In July Aixtron was talking about revenue of 800 million to 900 million euros. The September projection looks for 600 million to 650 million. And since this projection is for the year as a whole, it translates into a very big hit for the second half—a decline in revenue for the last half of 2011 of roughly 50%.

Aixtron also cut its projections for EBIT (earnings before interest and taxes) profit margins to 25% to 30% from the previous guidance of 35%.

A recent update from Credit Suisse on trends among Asian LED makers shows the source of Aixtron’s problem. Demand is down, prices are way down, and manufacturers are stretching out their capital budgets. This trend has been made worse by the end of subsidies in China to buy MOCVD equipment (that’s metal organic chemical vapor deposition, to you and me).

For example, Epistar, the largest manufacturer of LEDs in Taiwan, and a specialist in high-brightness LEDs used in general lighting, traffic signals, mobile phones and laptops, told Credit Suisse that it “might” cut capital spending by 65% in 2012 from 2011 levels. Another, Formosa Epitaxy, told Credit Suisse that it plans to cut capital spending by 33% in 2012.

What puts a stop to this kind of retrenchment? Read more

Update Cummins (CMI)

It’s not just what Cummins (CMI) told Wall Street analysts on September 13; it’s also that the company said it at all.

I mean Cummins knows there’s a global slowdown going on and yet the company’s CEO and COO got up and said that Cummins would hit $30 billion in annual sales in 2015, up from $18 billion today and a 14% compound annual growth rate. And that EBIT (earnings before interest and taxes) margins would expand to 18% from 14.5% today. And, the capper, that earnings per share would hit $20 in 2015.

That makes today’s share price of $97.56 equal to a 2015 price to earnings ratio of 4.87. You’ve got to wonder why the stock climbed only 6.9% on the news that day. (Cummins is a member of my Jubak’ Picks portfolio http://jubakam.com/portfolios/ )

If you suspect that they’re putting something strange in the water out there in Columbus, Indiana, you’ll be reassured to know that Cummins can actually make a logical case for this optimism. Read more