The heavy truck replacement cycle continues to play out exactly as Cummins (CMI) has outlined it over the last year.
The pent-up demand created during the Great Recession when truck owners put off replacing aging trucks will turn into new orders as the economy recovers with the big pickup in orders due for the first half of 2011, the company has repeatedly said.
If there’s indeed any problem with Cummins’ projections, it may be that the company underestimated the increase in orders and was conservative on timing.
ACT Research, a specialist in tracking and analyzing the commercial vehicle market, just released a preliminary report for December showing that Class 8 truck orders (that’s the heavy stuff that carries the highest margins) were up 25,500 in the month. That’s a 115% increase from December 2009 and the second-strongest order rate since May 2006. The two-month (November and December) cumulative order total hit 51,768.
Back on its third-quarter conference call Cummins forecast North American orders would climb 60% in 2011.
“With nearly 71,000 orders booked, the fourth quarter was the best quarter for Class 8 vehicles since the second quarter of 2006,” ACT noted.
That kind of order growth, which will turn into sales growth in 2011,would give a powerful boost to earnings under any circumstances. The Wall Street consensus calls for earnings per share to climb by 37% in 2011 after jumping a projected 102% in 2010.
But Cummins might actually—will, in my opinion—get more earnings growth than that out of the projected increase in sales in 2011. The company has restructured its operations to increase its EBIT (earnings before interest and taxes) profit margins from 8.8% in 2008 to a projected 12.5% in 2010. That means that earnings will growth even faster than sales. The company projects compounded annual sales growth of 13% from 2009-2014. EBIT margins during that same period, the company projects, will grow by 26%. You do the math.
If you own Cummins now, hold on. In my opinion the shares will move higher in 2011 even after a superlative 2010. If you’re looking for an entry, keep your eye on the company’s fourth quarter earnings report scheduled for February 1. I’m sure there are momentum investors in this stock by now who will be looking to sell on the news. And that might give you a chance to buy.
As of January 7, 2011 I’m setting a new, higher target price for Cummins of $136 a share, up from $116 a share, by July 2011.
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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Cummins as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.