CMI looks Fully Priced @ $119.58
By Paul Price
I liked Cummins (CMI) last October when we added 33 shares to our Virtual Value Portfolio at a price of $93.84. 2012 earnings came in at $8.69, down slightly from 2011’s all-time record of $9.07 (excluding a 48-cent non-recurring gain).
On February 6, the stock touched a 2013 high of $122.54. CMI closed near that level, at $119.62, on Monday. Management expects a flattish year. Consensus estimates revolve around $8.80. That puts the stock at about a 13.6x forward multiple. While that would be low for a consistent grower like Coca-Cola (KO) or Nike (NKE) it appears a bit high for CMI considering its typical valuation during the past nine years.
The average P/E during 2011 -2012 was 11.5x when Cummins was firing on all cylinders. CMI got as low as $79.50 in 2011 and touched $82.20 at last summer’s bottom.
Cummins’ EPS can drop significantly during economic slowdowns. It declined 39.5% from 2008 to 2009. Value Line noted CMI’s good and bad qualities in their recent report.
Unless you are extremely bullish on worldwide economic recovery, Cummins appears to have priced in all current expectations. That is hardly unprecedented for these highly volatile shares. CMI trades today for just below its April 2011 pinnacle. That high was set at 13.4x that year’s profits.
Buying CMI when the news was good turned out to be a bad idea. Taking a stake when panic was in the air proved to be a winning strategy. At those points valuations were lower while yields were higher.
Research firm Morningstar supports this view. Morningstar carries a neutral ranking on CMI while seeing fair value as 6.4% below the present quote.
Cummins is a good quality, classic trading vehicle. The peak in 2008 wasn’t exceeded until late in 2010. Last year’s high has yet to be seen again. Truly long-term thinkers are likely to be rewarded, but not nearly as well as smart traders who exit during optimistic times and re-enter when the doom and gloom is palpable.
We sold our Virtual Value Portfolio shares this morning at the opening price of $119.58 booking a $25.74 per share (+27.4%) profit, plus two 50-cent per share dividends.
CMI will stay on our back burner, as I'm waiting for a chance to get back in on any substantial sell-off.