Cummins stock traded at the highest price ever on Tuesday even after the company announced the largest quarterly drop in its 101-year history.
The Columbus-based company’s stock closed up 2.1% at a record $195.02 and traded above $200 for much of the day. The stock has roughly doubled in value since March 23, when Cummins was trading at $102.76.
One reason why the company’s stock increased after reporting a historically bad quarter was because Cummins beat Wall Street’s revenue and earnings estimates, local analysts said.
Cummins beat the consensus market estimate of $3.75 billion in revenue by around $150 million and earnings before interest, taxes, depreciation and amortization, or “EBITA,” by $206.5 million, according to figures provided by Roger Lee, senior research analyst with Columbus-based Kirr, Marbach and Co.
EBITA is a measure of company profitability used by investors.
“If you think about the stock market, whenever companies report earnings, you’re looking at how the company did in the quarter relative to what the market has as their expectation, and relative to the market expectation, (Cummins) performed exceedingly well,” Lee said. “…Cummins is not a company that is valued based on their sales. It’s not like a tech company that’s valued based on their revenues. It’s a company that’s valued based on their profits.”
Craig Kessler, president and chief investment officer with Columbus-based Kessler Investment Group, which is an institutional shareholder of Cummins, said reconciling a historically tough quarter with the record-setting stock prices “may appear somewhat counterintuitive.”
The stock price, however, likely reflects a perception that Cummins is well-positioned to come out of the pandemic with stronger market share and possibly fewer competitors, Kessler said.
“I think what we’re seeing play out is something that is similar to what we have seen in basically every industry since COVID and that is the strong are getting stronger and the weak are going away, and Cummins is clearly one of the strongest in their industry, both by market share and by financial strength. As a result, they are well-positioned to take market share, to survive to the other side of this pandemic and I think that is what the market really has seized upon more than the fact that they had the worst quarter.”
Additionally, Cummins’ record revenue in China during the second quarter as the Chinese government started to ease lockdowns and revive its economy may be a sign of things to come in the United States, both analysts said.
“My personal take is their strength in China should be indicative of pickup in the U.S. in upcoming quarters,” Lee said. “China was impacted by COVID first and then we got impacted a few months after. The same way China did slingshot demand, we should also see a slingshot.”
Kessler said Cummins’ strong results in China this past quarter may be, in part, fueling some of the “enthusiasm” for Cummins stock.
“I think we’re seeing what is to come, and I think that is part of what is behind the enthusiasm for the stock as well is the expectation that what we’re seeing in China is probably going to play out here in the United States, at least in some form,” Kessler said.
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Cummins stock closed up 2.1% at a record $195.02 and traded above $200 for much of Tuesday. The stock has roughly doubled in value since March 23, when Cummins was trading at $102.76.
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