Cummins (CMI, Financial), a maker of electric power generating systems and diesel and natural gas engines, posted better-than-expected financial results for the third quarter of 2014. Its results topped the consensus estimates on both the top as well as bottom lines. Cummins witnessed strong demand for its vehicle components in North America, Europe and China. Also, the recent economic rebound, dipping fuel prices and growing freight volumes, fueled its performance for the quarter.
The Columbus, Indiana-based maker of diesel engines for the third quarter reported revenue of $4.9 billion, an increase of 15% as compared to $4.3 billion in the same quarter a year ago. Also, its net income for the quarter rose approximately 19% to $423 million or earnings of $2.32 per share as against net income of $355 million or earnings of $1.90 per share in the corresponding period last year. The analyst had been modeling earnings of $2.28 per share on the revenue of $4.72 billion for the quarter.
Acquisitions to drive its growth ahead
Cummins is making significant progress with its North American acquisition strategy. The company has successfully executed four acquisitions so far this year. Also, it is expected to close another three acquisitions in the current quarter that should enhance its growth prospects in the future. Cummins expects these acquisitions to produce incremental revenue of $500 million and earnings of $0.35 per share for the company this year.
Moreover, the company is experiencing solid growth momentum in its heavy-duty, medium-duty and light-duty truck market in North America, despite not-so-impressive industry truck production this year. Cummins is realizing strong demand in on-highway market that is driving its sales for these market segments. The company is ramping up production and increasing its shipments for these market segments that should accelerate its sales in the fourth-quarter. Also, it expects its new ISG heavy-duty engine co-developed with Foton, a joint venture should accelerate its sales performance for heavy-duty truck market globally.
It expects its market size for heavy duty to increase about 22% from its earlier guidance of 15% boom. The company looks solid to maintain its heavy-duty market share of 37% this year. Cummins expects its medium duty truck market to grow 9% this year. Also, it anticipates its market share for medium-duty truck market to increase about 10 bps to 73% over 2013.
In addition, its light-duty and component market is gaining tremendous traction for the company across the world. Its shipment for light-duty vehicles has increased about 93% in China, despite a decrease of 28% in overall market demand. Further, the company plans to accelerate proportion of 2.8 and 3.8 liter engines truck co-developed with Foton that should enhance its overall sales performance this quarter. Meanwhile, the company has raised revenue guidance for its component business. It now expects its component revenue to increase about 15% to 17%, approximately 1.5% higher from its earlier guidance at the mid-point for its component business.
NS4 compliant trucks to drive its performance
Cummins sees a great demand for NS4 compliant truck in the future. It is experiencing strong pre- buying activity for expected an NS4 emission regulation. The NS4 compliant trucks are projected to cross 50% of the total industry production during the fourth quarter. Cummins is observing comparatively a larger adoption of its new NS4 compliant trucks in the market. The NS4 compliant truck represented about 40% of the total industry production in the third-quarter.
Better revenue guidance
Cummins has raised its guidance for the full year as it continues to see strong demand for its component business in North America, Europe and China. Cummins now projects its revenue to increase in the range of $19.03 billion to $19.38 billion. That represents a rise of about 10% to 12 % over 2013. This updated guidance also topped the analyst estimates of $19.02 billion for the full year. Also, Cummins now expects its earnings to grow approximately 13% to 13.5% of sales for the full year.
Conclusion
Cummins looks good bet for short as well as long-term investments. Its earnings are expected to grow at CAGR of 13.80% for the next five years that signifies sound growth prospects for the company in the future. Also, its short –term pain are very attractive as the analysts expects its earnings to grow at the CAGR of 21.00% this year and 19.80% for next year respectively.
It has low valuation that reflects great investment platform for investors. Its stock is currently trading at the trailing P/E of 16.19 and forward P/E of 13.21, indicating reasonable valuation for the company. It has PEG ratio of 1.15 that continues to support its growth over the long-run. It has profit and operating profit margins of 8.76% and 10.59% respectively for the trailing twelve months. Its balance sheet carries total cash of $2.38 billion, quite enough to cover its entire debt of $1.69 billion. It has operating cash flow of $2.14 billion, and leverage free cash flow of $718.50 million.
