I may finally have found my one honest man. And because of his honesty, I do believe I will buy his company’s shares.
First, I should tell you that his name is not Tim Solso…
After 11 years, Mr. Solso is about to step down as CEO of engine maker Cummins (NYSE: CMI).
Cummins is about as old-school industrial as it gets: The company was founded by Clessie Lyle Cummins in Columbus, Indiana back in 1919. Nowadays, they build everything from turbocharged truck engines to power generation equipment.
And while they still have plants across the United States, they also build in Canada, Brazil, England, Turkey, China, Russia, and Japan.
Brass tacks: Cummins is as good a global bellwether as you could hope to see. In 2010, they nailed down $1.04 billion profit off $13.23 billion in sales to some 190 countries.
The Usual Spin
In a valedictorian interview with Financial Times‘ Peter Marsh earlier this month, Solso bragged about his company’s “tremendous opportunities.”
Solso complains that “governments and the press have been too pessimistic about what’s happening in the economy,” and claims “the concerns about excessive public debt in Europe and the US, we are probably experiencing greater opportunities for expansion than ever before.”
Then he leaned on an excuse that has been driving me nuts for months now every time any heavy equipment player is queried about slowdowns in the U.S. and in Europe: “About half of the next four years sales growth — slated by Solso to average 14% per annum — will come from India and China.”
The End of the China Excuse
That line may have worked the last time the crap hit the fan back in 2008…
But now, China et al. are paying the heavy price for hauling our collective behinds out of the fire.
As I demonstrated clearly over the past few weeks (here and here), China has created banking and real estate bubbles of truly mind-boggling proportions. Growth is the least of Beijing’s worries now. Heck, even a soft landing might be a dicey proposition, considering the breadth and depth of the rot.
Can you imagine the look on some poor Western exec’s face when he’s informed by a Chinese apparatchik that he will be paid pennies on the dollar for the equipment he has already recorded as a profit on his quarterly report? Ooh, Mama…
Sell Solso, Buy Linebarger!
But here’s where it gets weird: The guy I DO like — the one U.S. exec who has laid the story out straight and clear — also works for Cummins.
His name is Tom Linebarger. He’s currently Cummins’ COO and will replace Solso as CEO come January.
And what he told the Financial Times just a few days ago paints a dramatically different scenario:
Europe could drive another global recession pretty easily. Some of the countries in Europe are already in a second recession, or will be shortly. That could get a lot worse.
The U.S. is in much the same spot. We’ll find out in three or four months if we are already in recession, but it wouldn’t surprise me to find out that the US is already in negative growth, once all the figures are adjusted, or we’re very close to that. I’m very concerned about that.
We’re seeing the effect of Europe on our business, though what worries me the most is the effect European problems will have on the rest of the world. The US is already weak. If Europe gets a bad cold, the US will get much sicker.
The REAL China Story
How about that old “sales to China will save us all” storyline?
Mr. Linebarger was refreshingly honest about Cummins’ prospects in the emerging world:
In China and India, their economies are doing well but inflation rates are high, so they’re cutting back on demand and raising interest rates to get inflation under control, which is hurting our markets,” he said. “All those things are near-term concerns of mine.
I don’t think the next six to nine months are going to be terrific, but if you look out over four or five years, I think it’s going to be good over that time. We’ll be in volatility in different markets at some point over the next four years, but over the period I see significant opportunities for Cummins to grow.
A Real Stand-up Guy
In a nutshell, Linebarger is telling us that the next couple of years are going to be really rough — with a lot challenges for CEOs and probably a good bit of stock market volatility.
But in the end, well-managed companies with decent product lines and strong sales forces will win out, and probably even score some decent growth.
WOW!
Now in all fairness, I have to tell you I just recommended short-term puts against CMI in Viral Investing.
I anticipate these contracts will do rather well over the next few weeks. I’m expecting gains anywhere between 30% and 70%.
But when it all really hits the fan — I’m thinking mid-2012 here — I plan to pick up more than a few shares of CMI on most any dip with the intention of holding them for at least the next five to ten years…
Heck, I might even pass them on to the grandkids!
So while you’re mulling over picking up some of those short-term puts against CMI for yourself, you might consider browsing the best investment ideas from our editors here at Wealth Daily and our sister publication, Energy and Capital. You can find them below.
Good luck and good hunting,
Adam Lass
Editor, Wealth Daily
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