Top Performing Companies Welcome Environmental Regulation

Yesterday on CNBC (video here), Tim Solso, CEO of Cummins, Inc. (CMI) was interviewed on Fast Money. Cummins is one of the year's top S&P performers. Mr. Solso had some very interesting things to say about environmental regulation.

"In the 1990's, we saw regulation as a challenge and a problem. But [...now...] we think we're the technical leaders. We invest in key technologies... The tougher the emissions standards and the faster they're implemented, [sic] gives us an advantage. It's a barrier to entry for other engine manufacturers ... Emission regulations are going all over the world ... We're already starting to get ready for the 2014 CO2 regulations with better fuel economy which will benefit consumers. Regulations are a good thing for us and it's a good thing for clean air and a clean environment."

The quote demonstrates that the top performing companies welcome regulation. It's their weaker rivals that are the first to seek regulatory relief. And, the purpose of Capitalism is to sort out and eliminate the weak competitors. Smart environmental regulation is an essential part of the process. Next time you hear politicians complaining about the effects of regulation on "small business," remember that they really mean "weak" businesses.

Back to Cummins, they're stock price history is displayed in the first image (above) along with step-ahead model predictions. The predictions are based on a best-fit model and, in this case, the best fit model is based on secular and cyclical trends in the US economy (the USL20E model). Unlike GM (here), the Cummins stock price is not a random walk.
Over time, there have been periods where Cummins stock was both over- or under-valued. The graph above plots the USL20E model predictions without external shocks, that is, the equilibrium position for Cummins stock price. Right now, at the end of 2010, Cummins stock is about at its equilibrium value.
For the future, the model predicts (above) that Cummins will have a pretty good run at least until 2015. However, there is a lot of variability in the prediction (the dotted lines are the upper and lower 98% prediction intervals), so there is plenty of both potential upside gain and downside loss if you're interested.