(CMI - Analyst Report
), the world-class leader in diesel engines, was last a Zacks #5 Rank Strong Sell in May of this year when it was trading $116. It subsequently dropped to $105 at the June lows before beginning a summer rally with the broad market up to its July 30 earnings report.
That quarterly beat of 11%, after April's 20% EPS miss, inspired analysts to brighten their outlook and to raise estimates again which pushed the stock back up to a Zacks #2 Rank Buy on August 2 before CMI rallied to new all-time highs near $140 in October.
But then Cummins did it again with another miss in late October, sending the stock tumbling down to $125. The company also notched revenue and margin guidance down for 2013. The majority of analysts immediately lowered their EPS estimates and outlook for this year and next.
The downward revisions were enough to knock CMI back down into #4 purgatory in November and then the #5 cellar again in this week. Here are the detailed EPS revisions tables that tell the story with hard numbers...
You can check out the in-depth Zacks analyst report to learn the details of the business and industry outlook for Cummins, but here we will just focus on the earnings estimate revisions that drove it back down to a #5.
The first thing to note in the top table is how much the full year 2013 estimates have come down recently. Those consensus EPS figures have fallen 6%, from $8.15 to $7.63, in just the last 90 days to result in negative 10% "growth" for the year. Before the April miss, CMI was expected to have full year EPS of over $9, representing nearly 10% growth.
Also look at the "Most Recent Consensus" row and how these estimates are near the bottom of the range of all the estimates. The most recent estimates are usually the most telling and influential in the Zacks Rank in terms of accuracy and predictive value.
In the second table, which highlights analyst Agreement, notice that they were all busy lowering their outlook in early November after that October report. The thing to remember about the Zacks rank is that once estimate revisions are more than 60 days old, they drop out of the quantitative calculation. So it's very possible that even without any upward revisions, CMI could rise to a neutral Rank #3 in January.
Growth, But From a Down Year
Finally, the Magnitude table gives you a good look at the impact of downward revisions on 2014. Right now, EPS estimates have been trimmed only 3.5% in the last 90 days from $9.74 to $9.39. For perspective, 2014 estimates started out earlier this year above $10.
But this still represents 23% EPS growth. For investors at this juncture then it all depends on what lens you use to view that growth. Do you see it as renewed momentum from a bumpy year, or as mere optimism painted over uncertainty?
And in the short term, how can you make a decision, whether you are a fundamental or technical trader? Here's my view...
Since the October 29 report, CMI shares have been trading sideways for nearly six weeks, trying to fill the gap down from that miss. But they have met stiff resistance at $134.
At this point, I wouldn't touch the stock again until analysts begin raising their EPS estimates and fundamental outlook again for the company. And since that isn't likely to happen until right before or after their next quarterly report in February, what lies ahead for this stock is probably a test of those October lows at $122.50.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.