This morning, rather than focusing on the handful of stocks driving most of the performance in the U.S. equity market and have no top in sight, Amazon, Facebook, Google & Netflix, I will instead focus on a handful of industrial stocks that seemingly have no bottom in sight. Yesterday, Merrill Lynch’s industrial research analyst cut his rating on Cummins Inc (CMI), the maker of truck engines to a sell. The stock responded by selling off, hard. To a new 3 year low and down 8% on the day. Merrill cited the following reasons for the downgrade and a 12 month price target of $90 that was well below the stock’s closing price on Monday, per Bloomberg:
U.S. truck market weakening faster than expected, now sees 17% decline in 2016 NA Class 8 production to 270k unit, BofA analyst Ross Gilardi writes in note; shrs down 0.9% pre-mkt.
–Components segment peaking; 2015 projected margins 14.3% “feel unsustainable”
–BofA global currency strategist David Woo sees China RMB declining as much as 10% against USD in 2016; would be “very bearish” for emerging markets, commodities, machinery and CMI
CMI is down 36% on the year, down about 43% from its all time highs made in June of 2014, and from a look at the 8 year chart below will most likely test long term support at $80 in the near future:
I have two take-aways. First from a purely technical standpoint. As soon as the stock broke the uptrend that had been in place since the lows of 2009, the stock should have been sold on every rally. The technical breakdown corresponded with lower earnings and sales revisions, BUT the stock’s decline ytd comes during just a 1% eps & sales decline year over year (assuming that Q4 did not fall off a cliff) from what was a peak in 2014. And CMI’s eps and sales decline yoy is less that of the SPX, which, per FactSet, just registered a post financial crisis milestone:
Second Consecutive Quarter of Earnings Declines (-1.3%)
The blended earnings decline for Q3 2015 is -1.3%. The third quarter marks the first time the index has seen two consecutive quarters of year-over-year declines in earnings since Q2 2009 and Q3 2009. It also marks the largest year-over-year decline in earnings since Q3 2009 (-15.5%).
Third Consecutive Quarter of Revenue Declines (-3.9%) The blended revenue decline for Q3 2015 is -3.9%. The third quarter marks the first time the index has seen three consecutive quarters of year-over-year revenue declines since Q1 2009 through Q3 2009. It also marks the largest year-over-year decline in revenue since Q3 2009 (-11.5%)
While future growth for the company is levered to emerging markets and domestic energy production and the like, CMI got about 53% of their sales last year from the United States. The stock trades about 11x expected 2016 earnings that consensus has declining 4%, .9x sales, has a fairly solid balance sheet, a $16.4 billion market cap, $1.7 billion in cash and $1.65 billion in debt, buys back their shares and pays a dividend with a 4.2% yield (and going higher).
It’s just odd to me that investors continue to crowd into stocks where growth massively trumps valuation and hate sells stocks that seem to be ok (at the very least), especially on a relative basis. Yeah I get it, cheap gets cheaper, But I bring up the divergence in investor sentiment because I think it is less than bullish for the broad market. Especially in a year where the SPX has essentially traded sideways and ignored lots of bad news. If 2016 is to bring a meaningful and sustained equity correction, then I suspect that we will look back at stocks like CMI, CAT, DE etc and say that cyclical stocks were the tell in 2015. But that will also be hindsight.