The industrial market is improving due to better economic conditions. As a result, the construction market is picking up, leading to strong demand for engines from the likes of Cummins (CMI). Similarly, the need for oil is also rising, giving rise to demand for oil services companies such as Halliburton (HAL). Let's see how the companies are positioned to benefit for the long run.
Cummins eyes on opportunities for further growth in its engine and component businesses with the rapid adoption of new NS4 emission standards.
Foton in partnership with Cummins raised the proportion of its trucks powered by the 2.8- and 3.8-liter engines manufactured in a joint venture which resulted in 69% year-over-year increase in shipments of light-duty engines in China. These engines have been very well received by end users, and there are exciting prospects for further growth in the light-duty market with the advancement of emissions regulations in China. Cummins continued to grow its partnership with Foton and launched its new ISG heavy-duty engine during the second quarter.
However, the industry demand in the truck market declined 10% in the second quarter compared to the second last year.
Power generation revenues declined by 16% in the second quarter for India due to lower electricity consumption and fewer orders for new power generation equipment in the weak economy.
Cummins raised the quarterly dividend by 25 percent earlier this month, coupled with the approval of a new $1 billion share repurchase program by the Board of Directors. This is in line with the company’s commitment to return 50 percent of operating cash flow to shareholders, which also reflects the confidence of management in the company's future.
Cummins reported net income of $446 million ($2.43 per diluted share) for the second quarter of 2014, compared to $414 million ($2.20 per diluted share) in the second quarter of 2013. Analysts on average had expected earnings of $2.38 per share on revenue of $4.83 billion, according to Thomson Reuters. It reported second quarter 2014 EBIT of $657 million or 13.6% of sales, compared to $621 million or 13.7% in the same quarter last year.
Halliburton plans to activate additional rigs over the next several quarters adding to a total of four rigs by early 2015. And during the second quarter, Halliburton acquired Europump, an industry leader in progressive cavity pump systems to expand its artificial lift capabilities.
In the third quarter, Halliburton expects to begin operations on an integrated deepwater project for a major customer providing drilling and completion services across multiple wells.
During the second quarter, Halliburton also acquired Neftex Petroleum Consultants, a market leader in reducing uncertainty in basins across the world. This acquisition is believed to help integrate data and interpretations from the Neftex Earth Model with Landmark’s DecisionSpace platform. Halliburton is expected to accelerate its customer’s ability to explore prospects and enhance its ability to predict drilling success through the acquisition.
Halliburton is witnessing more activity in onshore rigs, wells and horizontal drilling and the need for additional services.
According to Baker Hughes, the average number of drilling rigs active on land increased 5.6 percent in the U.S. to 1,781 in the quarter as a result of the producers looking to pump up the output from shale formations.
Luke Lemoine, an analyst at Capital One Southcoast in New Orleans, rates Halliburton as a buy due to tightening in overall frack capacity. Halliburton is believed to add fracking equipment and crew to benefit from higher demand in the region that indicates an industrywide recovery after a two-year slump.
Halliburton is expected to accelerate additions immediately to its hydraulic fracturing fleet and logistics capabilities, with new crews available for service beginning later this year.
The recent solid financial performance of Halliburton has enabled it to increase its shareholder distributions in addition to maintaining strong liquidity to fund future growth. This also reflects its confidence in the strength of its long-term business outlook, its commitment to shareholder distributions and its focus on delivering best-in-class returns.
Hence, both companies are on track to profit from higher industrial activity. As such, investors should take a look at both companies to profit from industrial growth.