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Dividend Investor
Safe Income and Dividend Growth

August 1, 2017

Two of our stocks reported earnings and opened lower this morning. I’m keeping one on Hold and moving the other, which was rated Buy, to Hold as well.

General Motors (GM) and Cummins (CMI) both opened lower this morning. I’m keeping GM on Hold and moving CMI, which was rated Buy, to Hold as well. See the updates below for details.

General Motors (GM) remains on Hold

GM is trading 3.5% lower this morning after the automaker’s July sales missed expectations.

GM sold 226,107 autos in the U.S. last month, down 15% from a year ago. Analysts were expecting a 9% drop.

The decline was mostly due to a planned 81% reduction in sales to rental fleets. Rental fleets primarily buy small passenger cars, which have low margins, and which they resell fairly quickly, depressing prices. Demand for small passenger cars has dried up in recent years, exacerbating the problem. While analysts may approve of GM’s long-term strategy, GM’s sales still fell more than expected, causing the drop in the stock. Sales also slipped at Ford (F) and Fiat Chrysler (FCAU), though they cut rental sales by less and their stocks dropped less.

On the bright side, crossovers and trucks, which have high margins, accounted for 80% of GM’s retail sales last month.

GM is now trading right around its 50-day moving average. I’ll keep it on Hold.

Cummins (CMI) moves to Hold

Cummins reported second-quarter earnings that fell short of estimates this morning, and the stock dropped 6.7%.

Sales beat estimates, rising 12.1% to $5.08 billion—analysts were expecting $4.79 billion. But EPS of $2.53 fell short of estimates. Analysts were expecting $2.58, up from $2.40 last year. This was the first time in over a year that Cummins has missed estimates. Management presentation cited higher warranty costs, which impacted gross margins.

For the full year, management reiterated their EPS guidance and raised sales growth estimates, from 4%-7% growth to 9%-11% growth.

In other words, the report was largely positive. But given the market’s reaction, I’m moving CMI to Hold today. We’ll see if the stock can bounce in the coming days.