On Wednesday, a spokesman for Cummins, Inc (CMI) announced that the company will be temporarily cutting about 400 jobs at a plant in western New York. Currently, the Jamestown Engine plant employs about 1300 workers with 1100 of those are on the production side and the plant is working at near full capacity, producing about 500 diesel trucking engines per day. While the plant is manufacturing at about full capacity, new emissions standards will come into effect starting in January. The company is expecting demand for engines will fall to about 100 units per day after the regulations take effect, and anticipated that demand will return only gradually.
Changes in U.S. emissions standards take effect in January, part of the tightening of rules that occurs every several years, Land said. The change prompts customers to buy existing engines because they are less expensive, delaying purchases of the new engines.
“We always see this sort of peak/valley effect,” Land said in the e-mail. “The situation this time is being amplified by the fact that the U.S. economy remains very weak, so there is very little intrinsic demand for trucks – or truck engines.” — Bloomberg.com 12/2/2009
The reports of a challenging start to 2010 and the job losses (which the company claims many are voluntary and/or temporary and will retain health benefits) comes on the same day that
the ADP jobs report shows “improving” trends. Private employment declined by 169,000 jobs in November, and even though the report was worse than economists had predicted, it was viewed as a positive development by most. The timing of Cummins decision also flies in the face of recent ISM manufacturing data that showed progress as well.
As North America’s largest manufacturer of diesel engines, Cummins sees their business affected by changes in emission standards probably more than any other business. In addition to the changing regulatory requirements, the company also has to deal with the still weak economy that has put a damper on demand for new trucks already. Cummins stock took a beating in Wednesday’s trading session, falling almost 8% on volume that was three times an average day. Interestingly, the stock has more than regained those losses in after hours, but the reliability of post market trading can be suspect.
At Ockham, we have had an Overvalued stance on Cummins for the past few months as fundamentals have continued to show weakness. Both sales and profits have declined greatly from a year ago, and as the news today suggests the prospects for improvement in the near term are dim. In fiscal 2009, revenue is expected to fall by more than 28% and profits per share by more than 50%. Remember those dismal results are prior to the additional strain of the new emissions standards set to hit in 2010. It truly is a very difficult situation for the company, but as of right now we cannot advise buying shares until the fundamentals start to show some improvement.
