Cummins (CMI, Financial) ended the last fiscal year with strong growth in key financials. The company impressed everyone with good number across the board which also helped it to gain good market share in past one year. It wasn’t a matter if surprise much as the analysts also received the results positively. The main reason behind this commendable performance by Cummins is its relentless focus on its significant resources which drove improvements in product quality leading to better product performance. The company is now excited about fiscal 2015 it is focusing on some key aspects to drive its profitability. Bringing down the quality related costs will be among top of Cummins' priorities in 2015.
What's driving growth
The reason behind success of Cummins has been its best-in-class quality products and satisfactory performance by its products. This is giving enough strength to Cummins and as a result the company is confident of far better performance in 2015. It is anticipating a good 2% to 4% growth in the revenue. However, this doesn’t seem smooth for Cummins as it is seeing some headwinds on the back of weak performing international markets and negative impact of stronger U.S dollar. But the company is expecting: the solid growth in North America, introduction of new products and distributor acquisitions to support its growth and offset the negative impacts of the headwinds.
Moving to China, Cummins is seeing mixed performance in these markets. As on one hand Cummins expects the domestic revenue including the joint venture to increase by 15% in 2015 while on the other hand, it is seeing the medium-duty and heavy-duty truck market declining by 6%. Despite this decline, Cummins is still confident of holding a good edge as it is seeing growth in the volumes of its new ISG engines which it thinks will give new colour to its growth momentum even in the declining truck market in China.
Opportunities abroad
There are good opportunities for Cummins in India. As the new government is focusing on investments in infrastructures, Cummins is optimistic about the demand growth in 2015 in India. In addition, Cummins expects truck production to increase by 8% in India that will also give good growth opportunities for it in future. While in Brazil, Cummins is expecting soft performance as before the government was the important source of financing commercial vehicles but recently due to economically headwinds the government has tighten the programs by raising interest rates also limiting the loans to 70% of the vehicle price. Due to this Cummins is expecting low demand for trucks in Brazil leading to soft performance.
Moreover, Cummins is all set to bring in new products out of its pipeline which are expected to impact positively to the company’s growth story. It is seeing good traction for its new ISG heavy duty engine it is already seeing growth in the volumes and is expecting the ramp up in the demand in 2015. Its largest engine namely QSK95 is under production and is expected to contribute well to company’s growth in future.
Conclusion
Moving on to fundamentals now, with trailing P/E of 15.69 the stock looks reasonable while the forward P/E of 12.30 indicates steady growth in the earnings in near term. A profit margin of 8.59% can be a good attraction to the investors which may lead it to gain market share in future. The recent financial results and an impressive track record indicates that Cummins has a long way to go. As of now it is a good pick and the investors should definitely include it in their portfolio.
