BUCY Bucyrus International, Inc. (MM)

Many investors may be starting to worry about a slow-down in the global economy that could impact cyclical industries and stocks. And as the market enters a seasonally-weak period where profit-taking may prevail in the short-run, we have to ask two questions: "How bad could it get?" and "Where will the bargain opportunities be?"

Despite all the handwringing about sovereign debt crises in Europe and the US, it's not clear that these macro forces should derail the recovery which is largely driven by emerging markets. Two industrial companies benefiting from emerging markets growth, and upward earnings revisions, are Caterpillar (CAT) and Cummins (CMI). Both are Zacks #1 Rank (strong buy) stocks and when the market noise this summer gets loud about a slow-down, in the US or China, investors should look at pullback opportunities in these leading companies with strong stocks.

Caterpillar's diverse equipment manufacturing base was recently given a big shot in the arm with the acquisition of Bucyrus (BUCY), making the combination the largest mining machinery provider in the US. After record first quarter earnings of $1.84 per share and company guidance upping revenue estimates for 2011 into the $52 to $54 billion range ($6.25 to $6.75 EPS), analysts started raising their estimates driving the Zacks Rank back to #1 on May 3.

Trading at about 15 times forward earnings, CAT is also diversified geographically, selling dozens of different models of construction and mining machinery in dozens of countries and garnering over 50% of its revenues from abroad. CAT is also a global leader in diesel and natural gas engines and industrial turbines and power generation systems. The average analyst estimate for this year is above company projections at $6.90 and represents 65% year over year growth, nearly in line with the industrial sector as a whole which currently leads the economy.

CAT shares appear to be finding good support for now above the $100 mark, with the June 1 sell-off unable to violate the May lows. While the 50-day moving average up at $108 is proving to be resistance, the rising 200-day sitting near $92 currently should be used as a buying opportunity if $100 is breached. Investors may even consider selling second or third month puts at the $95 or $90 strikes for exceptional return-on-risk opportunities.

Nat Gas Engine Dreams

Speaking of engines, our second industrial name, Cummins, is the $20 billion giant in diesel and natural gas engines, electric power generations systems, and engine-related components, fuel systems, controls and air handling systems. Headquartered in Columbus, Indiana, the company serves more than 190 countries through its network of 500 company-owned and independent distributor facilities and more than 5,200 dealer locations. The company’s customer base includes Chrysler, Daimler AG, Volvo, PACCAR, Navistar, CNH, Komatsu, Ford, and Volkswagen.

Cummins is positioned to benefit from several trends, such as new emission standards, fuel economy improvement (i.e., light-duty diesel penetration) and favorable trends for its Power Generation business (i.e., increased demand for electricity against either aging or insufficient grid capacity). Although a wild card because of political battles in Washington, of particular interest for Cummins are the proposed legislative and economic tax incentives favoring the conversion of 18-wheeler trucks to run on natural gas engines.

Cummins has a 50:50 joint venture with Westport Innovations (WPRT) to capitalize on this potentially explosive trend whereby the US could make huge strides toward energy independence and pollution reduction by taking advantage of enormous underground reserves of cheap, clean-burning natural gas. This is a pet project of oil tycoon T. Boone Pickens, but not surprisingly he is meeting stiff opposition from the oil lobby to get the necessary bills through Congress.

CMI became a Zacks #1 Rank (strong buy) stock in February and then again in late April following its first quarter report. As Todd Bunton, the Growth and Income Stock Strategist for Zacks, reported in May, "The company delivered a 22% positive earnings surprise on April 26 driven by better than expected revenue. CEO Tim Solso stated in the first quarter press release that its "outstanding first quarter results demonstrate that we are well positioned to take advantage of our significant growth opportunities as markets around the world continue to recover." The company went on to raise its guidance for 2011. Consensus estimates shot higher, with the 2011 Zacks Consensus Estimate jumping from $7.22 to $7.87."

For the month of May, CMI has dropped over 15% from near $120 to sit on support at its 200-day moving average just above $100. Investors who like the growth story of Cummins have two things on their side for considering long positions here: the Zacks #1 Rank and the pullback which has made shares more attractive at less than 13 times forward estimates with a PEG ratio of under 0.7.

For investors who believe that cyclical industries will continue to outperform on the back of emerging markets growth, establishing positions in global leaders on pullbacks could be a smart move. Using the Zacks Rank for short-term earnings-driven trading opportunities can provide an advantage during market downdrafts because it alerts you to strong stocks that are likely to outperform. And as long as the Zacks Rank remains at #3 or higher, one can take a longer-term view against global growth trends where heavy machinery and engine makers like these two will continue to dominate their fields and produce record profits.

Kevin Cook is a Senior Stock Strategist for Zacks.com

To learn about Kevin's background and approach to markets, click here.

 
BUCYRUS INTL A (BUCY): Free Stock Analysis Report
 
CATERPILLAR INC (CAT): Free Stock Analysis Report
 
CUMMINS INC (CMI): Free Stock Analysis Report
 
WESTPORT INNOV (WPRT): Free Stock Analysis Report
 
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