Cummins – An Oversold And Undervalued Dividend Stock

By Robert Hauver

The market has fallen out of love with stalwart Industrial dividend stock Cummins, (CMI), sending its shares down over 16% in May.  Lowered guidance from fellow equipment maker Joy Global, (JOY), has also helped to depress CMI’s shares this week. JOY cut its guidance approx. 3.4 to 4.5%, down to a $7.15 to $7.45 range, and trimmed its revenue guidance by approx. 1.8%, based on weaker mining equipment demand from US coal miners.

Here’s the anomaly and the opportunity: JOY’s coal mining equipment business is slowing in the US because of the ongoing natural gas boom, which is causing utility and other power users to switch from more expensive, dirtier coal, to cheaper, cleaner natural gas.  BUT, as the biggest natural gas and hybrid bus engine manufacturer in the US market, Cummins will gain from this shift from coal to natural gas, as more fleet owners switch to these natural gas  and hybrid engines.

How to play it:  Click here to read more…

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

2 Easy Ways To Earn 20% On Industrial Dividend Stocks

By Robert Hauver

Although Industrials are down approx. -4% year-to-date, this sector may hold some of the best stocks to buy moving forward. Standard & Poor’s ranks Industrials as #2 in projected EPS growth for 2012, right behind Tech, which gives it the 3rd lowest PEG ratio for 2012:

S&P-EPS-Q3

(Data source: Standard & Poors)

Thus far, 86% of S&P 500 Industrials have beaten or met their Q3 2011 Earnings Estimates, 2nd only to Tech.

S&P-EPS-BEAT-Q3-'11

(Data source: Standard & Poors)

Although this sector looks attractive, finding undervalued high dividend stocks here with strong metrics is still a challenge.  A different approach would be to look for a lower-yelding dividend paying stocks, that have stronger growth and financials, and then utilize options to ramp up the dividend yields on these dividend stocks. Both Caterpillar and Cummins have less-than-avg. dividend yields, but you can greatly improve upon their dividends by selling options.

CAT-CMI-DIVS

Covered Calls: Take a look at the big difference between these high option yields and the dividend yields during these 6-7 month trades.

CAT’s call options pay over 9 times their dividends, while CMI’s pay over 15 times.

(The call and put options listed in this article for CAT expire in May, and those for CMI expire in June.)

(You can find more details on this and more than 30 other high yield covered call trades in our Covered Calls Table.)

CAT-CMI-CALLS

Cash Secured Puts: Another proven tactic is selling cash secured puts below the stock’s current share price, in order to achieve an even lower break-even price. The put trade listed here for CMI has a break-even only 3% above CMI’s 52-week low. These put options pay 9 to 16 times more than the dividends in these trades.

Your broker will secure a cash reserve in your account, equal to however many put contracts you sell, times the strike price of the put you sell. This amount is released once the puts expire or the trade is closed. Hence the term, cash secured puts. You’ll get paid for any puts and calls that you sell within 3 days of the trade, often even the same day. Note: put sellers don’t receive dividends, but call sellers do.

The best time to sell cash secured puts is normally when the stock is at the lower part of its range, which will give you an even lower break-even. Both CAT and CMI are higher-beta stocks, which fluctuate widely with the market, so check out their put prices during the next pullback.  If you need to be even more conservative, you could also sell cash secured puts at a strike price further below the current share price. This will give you a lower premium, but a lower break-even also.

(You can see more details on these and over 30 other high yield options trades in our Cash Secured Puts Table.)

CAT-CMI-PUTS

EPS/Sales Growth: Both CAT and CMI had strong EPS growth in their most recent fiscal years, and also strong sales and EPS growth in their most recent quarter:

CAT-CMI-EPS

Valuations: CAT’s PEG for its next fiscal year is very low, while CMI’s is consistent with the sector’s .87 PEG. CAT’s Price/Book and Price/Sales are consistent with its industry, while CMI’s Price/Book is a bit higher than its industry avg. of 2.58, but its Price/Sales is lower than the avg. of 1.30

CAT-CMI-PEG

Financials: Although CAT carries a heavier debt load, its interest coverage ratio is 5.9x.

CAT-CMI-ROE

Disclosure: Author is short puts on CAT and CMI.

Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

Cummins – An Industrial Dividend Stock WIth Great Earnings and High Options Yields

By Robert Hauver

Cummins, (CMI), is an Industrial dividend stock that just reported Q3 2010 earnings that blew away their Q3 2009 numbers, and also increased its credit rating during the quarter:

CMI-Earns-2010-10-27

The results were favorably impacted by $32 million due to a legal ruling in Brazil involving tax on imports from 2004 through 2008. (Adjusted net income excludes the Brazilian tax gain.)

All 4 of CMI’s market segments had strong Q3 Sales and Earnings Growth:

CMI-Sales-2010-10-27

Cummins COO said, “Many of our U.S. markets remained weak as a result of the slow recovery in the U.S. economy,”, and added, that the company doesn’t “expect to see any meaningful improvement until 2011” in the U.S., BUT, business in emerging markets “has come back much faster than we had forecast.”

CEO Tim Solso stated, “Our strength in large international markets provided significant benefits to the company, and we continue to see productivity improvements in our manufacturing operations.”

Overseas sales increased 69% in the third quarter, led by India, Latin America, South Pacific and the U.K., and now account for 63% of CMI’s consolidated revenues.  North American sales declined 3%.

In response to its third-quarter profit tripling from a year ago, CMI is raising its quarterly dividend by 50%, to $.265/share, a yield of 1.19%, AND raised its full-year financial EBIT guidance to 12.5% of sales on revenues of $13 billion.  CMI also bought back $79 million of its shares in Q3 2010, bringing total shares repurchased to $389 million under its current $500 million authorization.

Apparently, increasing revenue by 34%, tripling its profit, substantially raising the dividend, AND increasing their guidance, still wasn’t good enough for some analysts, who had pumped up expectations for CMI even further, (Hmm, do we  sense “irrational exuberance” in the wind?), and the stock got hammered, falling nearly 8%, from $94.49 to a low of $87.00 after reporting earnings.

Fortunately for contrarians and value investors, such hysteria creates opportunities. This big fall has inflated CMI’s call options and put options, which now offer double-digit yields for covered calls and cash secured puts:

CMI-Calls-Puts-2010-10-27

There are further details on these options trading strategies in our Covered Calls table and in our Cash Secured Puts table.

Company Profile:

Cummins designs, manufactures, distributes and services engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations. Cummins reported net income of $428 million on sales of $10.8 billion in 2009. (Source: Cummins website)

If you’re looking for dividend paying stocks with strong international sales and earnings, Cummins is worth researching further.

Disclosure: Author is short puts of CMI.

Disclaimer: This article is written for informational purposes only.