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Will This Engine Producer Deliver Better Performance in the Future?

August 31, 2014 | About:

Investors were not impressed with motor producer Cummins' (NYSE:CMI) second-quarter results. Despite the fact that the organization reported robust development in both top and bottom lines, furthermore raised its revenue forecast for the full year, the way that it didn't raise the earnings direction didn't rundown well with investors. As a result, Cummins shares exchanged lower after the results were released.

Anyway, the positive side is that investors can consider this as a chance to purchase more shares of Cummins on the drop as the organization has good long haul prospects. It is on track to profit from increasing car sales and its partnership with Westport Innovations to tap the regular gas vehicle market.

Development across the board

Cummins is seeing expansive based strength across its business. As far as margins are concerned, the organization seems to be conveying strongly on this consider well. Case in point, in the components business, Cummins conveyed record revenue and EBIT development. Revenue increased 15% year-over-year, while EBIT percent enhanced by 230 basis points to 14.5%. Higher volumes, lower guarantee costs, and stronger cost controls prompted a change in the EBIT margin, and the momentum is expected to sustain.

Truth be told, Cummins expects EBIT in the components business to increase 25 basis points to the scope of 13% to 14% this year. Components is the second-largest and the second-fastest developing segment of Cummins, so a positive forecast in this business indicates better times proceeding.

Factors driving development

Additionally, Cummins new products are performing admirably, and item disappointment rates have dropped to low levels. As a result, guarantee costs per motor on EPA 2013 engines are much underneath the cost of EPA 2010 engines. Looking ahead, the organization is sure about lessening these costs further in 2015.

Cummins' motor business, its largest segment, is also conveying robust operational performance, especially because of strength in its assembling operations. Gross margins in this business, before item scope costs, stayed strong despite weakness in certain end markets. In addition, Cummins has finished three acquisitions in North America so far this year, and expects to finish four all the more before the year's over. These acquisitions will further increase Cummins' foot shaped impression in engines and permit it to tap solid request in on-interstate markets.

Moreover, shipments to the North American overwhelming obligation truck business sector increased 11% from the second quarter of 2013, surpassing 23,000 units. In the medium-obligation truck business sector, Cummins conveyed more or less 20,000 engines in the second quarter, an increase of 28% as contrasted with a year back. Apparently, Cummins is seeing extraordinary footing in the motor business, and there are more change possible because of the healthy development in the trucking segment.

Also, Cummins' National Standard 4 item is doing great. Request has been robust as contrasted with last year, owing to end users purchasing in front of the new Ns4 emission regulations. The transition to Ns4 products is required to proceed in 2015 as well, and around half to 60% of industry creation of substantial and medium-obligation trucks in the final quarter of this year is relied upon to be Ns4 agreeable, over the previous estimates.

End-business prospects are strong

As per Alix Partners, the overwhelming obligation truck business is required to develop at a CAGR of 5.4% through 2016. Indeed, developing markets such as China and India may clock development rates of up to 7.2%. As such, Cummins should see a sustained strength in sales of its engines going ahead. Likewise, the organization's tie-up with Westport Innovations could be an alternate driver, permitting it to tap the common gas trucking business sector.

As per Navigant Research, the aggregate number of characteristic gas vehicles across the globe will hit almost 1.9 million trucks and 1.8 million busses by 2022. Cummins is in a joint wander with Westport, and the two have created a forefront motor. Henceforth, Cummins should see solid development in its motor segment going ahead, determined by advancement and the expansion of the end market.


With everything taken into account, Cummins seems overall positioned for development going ahead. The organization is sitting on a great deal of chance because of secular development in the business.

At the same time, investors should also investigate Cummins' valuation. Its trailing P/E is 17.60 and forward P/E is 13.18. Also, it is superior to the industry's P/E normal of 22. At last, Cummins' prospects should lead to strong bottom line development, and analysts expect the same. Its earnings are expected to grow at an impressive CAGR of 14.07% for the following five years, marginally over the industry's average of 13.70%. Subsequently, investors should certainly consider Cummins for their portfolio as the stock can convey solid upside over the long haul.

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