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Looking Beyond Cummins' Latest Quarterly Report

August 28, 2014 | About:
amal.singh70

amal.singh70

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Diesel and natural gas engine maker Cummins (CMI) reported fantastic results for the second quarter. The growing demand for clean and fuel efficient engines drove its business to new heights, which can be seen in an impressive improvement in the company’s top line and bottom line. The management is bullish about its performance in the future.

Impressive performance

The company has posted an upbeat guidance although Cummins did see some weakness on the international front. Still, the booming market in North America has offset the loss that occurred overseas. Cummins’ strength lies in many key points such as steady revenue growth, strong balance sheet and attractive dividend.

In the recently reported quarter, Cummins posted a good growth in revenue by 6.9% to $4.835 billion. This was good enough to beat the consensus estimates of $4.832 billion. Sales in North America were one of the major contributors to Cummins’ success story. Sales in North America rose 14%. Cummins also impressed on the earnings front, posting an 11% improvement to $2.43, which is up from $2.20 per share a year ago.

What's driving growth

Cummins’ strength lies in its two underlying businesses, namely components and engine. These businesses have always played an important role in taking Cummins to a newer level. Cummins is pleased with its components business. It is expanding its profit margins. This can be seen in a solid 15% revenue growth in this business. Cummins is expecting a good contribution from this segment in the future. Higher volumes, lower warranty costs and stronger cost control initiatives are expected to further broaden Cummins’ profit margins in the future.

In addition, the overall industry sales for the engines are improving, which indicates bright opportunities for Cummins. Even management is quite relaxed seeing good demand for engines. This fact is evident according to CEO Tom Linebarger: "Demand is growing in on-highway markets in North America this year as the economy improves, and we have gained market share in medium duty truck and bus markets." This statement confirms that Cummins’ growth story will continue.

Concerns and strategies

However, Cummins is struggling with higher warranty costs for EPA 2013 engines. This is because of the higher complexity of these engines. Cummins is confident of reducing this higher warranty cost further by 2015.

Moving on, Cummins is focusing on North America. Seeing good growth in sales in the past, Cummins is well positioned to capture the on-highway markets in the future, as it is seeing growing traction in this area. This can be noted by the increase in the shipments of North American heavy duty trucks. It shipped more than 23,000 units, which clearly depicts the growth in the underlying market for Cummins. Also, in the medium-duty truck market, Cummins is expecting a good increase in sales as it is expecting the market to grow by 9% in future.

End market is strong

Moreover, in the light truck market, China stood as the number one contributor to Cummins’ success as shipments of light-duty engines in China increased 69%. Cummins is seeing bright prospects in this market in China. Cummins is also planning to extend its partnership with Foton, and it is launching ISG heavy duty engines which will again help the company to drive its financial performance.

The company did see some weakness in the international markets. It saw weak sales in regions such as India, Mexico and Brazil, which can be due, primarily, to weak economies. However, China did show fractional improvement, which came on the back of stronger demands for engines and components in on-highway markets.

Conclusion

With a trailing P/E of 17.49, Cummins looks cheap. Its prospects seem strong. With the growing demand for fuel engines, Cummins can improve its earnings in the future. Even the forward P/E of 13.08 shows that there room for earnings growth in the future. Besides these, the strong balance sheet and an impressive dividend payout are more reasons why investors should consider this stock.


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