Cummins (CMI, Financial) failed to achieve enhanced profitability in its power generation business. Therefore it has executed some key strategic options to bring down the costs such as merging two international lines of business and exiting substitute German operations.
Improving quality and product development
Further, Cummins reported an increase in its quality cost for its engine business during the year which exceeded its expectations in the beginning of 2014 and led to the complete year warranty cost expanding by 0.5% as a percent of sales.
The solid cost-cutting efforts of Cummins might affect its profitability due to reduced strategic investments and thus poorly affecting the shareholder returns.
In the start of third quarter, Cummins focused noteworthy resources on achieving enhanced product quality and superior customer service operations for improving both the product performance and minimizing the impact on customers.
Cummins has witnessed a significant expansion in the heavy duty truck market in North America, reaching nearly 268,000 units in 2014 and 23% growth from the last year’s levels. The market for medium-duty trucks reached nearly 127,000 units in 2014, an increase of 13% from 2013. Cummins continued to lead the medium-duty truck engines market in 2014 with its market share rising to 72%. The supply to Chrysler enhanced by 9% in 2014. However, U.S. military shipments declined by 39%. The conventional market segment sales that include non-residential construction remained constant on a year-over-year basis.
Cummins' solid efforts on improving its product quality is bound to attract several other key customers and expand the company’s already robust customer base, going forward. Cummins' strategic achievement of marking record shipments for medium-duty and heavy-duty truck engines in North America highlights the company’s successful technological know-how and portfolio enhancement techniques.
Internationally, Cummins' significant growth in China was partially offset by the shipment declines in India and Brazil. In Brazil, Cummins reported 26% decline in industry truck production due to the economic slowdown in the key Brazilian markets. The expanding power generation business resulted in significant demand increase for the generator sets.
Cummins reported its full-year engine market share to increase from 10% in 2013 to 12% in 2014 coupled with a robust growth in its components business. Its supply of light-duty engines in China improved by 78% with Foton expanding the quantity of its trucks fired by the 2.8-liter and 3.8-liter engines developed in its BFCC’s joint venture shifting competitor engines.
The increase in shipments to China for Cummins key truck engines were balanced by the shipments decline witnessed in major growth markets of Brazil and India. However, the power generation business of the technology major recorded significant growth. The ongoing year-over-year market share expansion of Cummins' key truck engines is forecast to benefit it in the long term and thus defeat its competitors.
The overall market size of heavy-duty trucks in North America is anticipated to be 29,000 units in 2015, a year-over-year growth of 8% with its market share estimated to remain steady at nearly 36%. For the medium-duty trucks, Cummins expect its market size to expand by 1% to 128,000 units and estimate its market share to be approximately 67%.
Cummins' light-duty engine demand in China is forecast to increase by 30% in 2014 regardless of any expansion in the market with Foton continually leveraging a greater number of its engines. In addition, Cummins anticipates industry sales of its excavators to fall by an additional 9% in 2015.
The steady rise of the demand for medium-duty and heavy-duty trucks in North America and China are believed to significantly benefit the company’s top line and bottom line, going forward.
Further, Cummins is immensely positive about the expanding industry demand by the end of fiscal year 2015 with the industry truck production estimated to enhance 8% to 270,000 units and power generation equipments demand expected to rise reasonably to 5% for the year.
The innovative ISG heavy duty engine of Cummins launched recently in China is expected to gain significant volume increase throughout the fiscal year 2015. Cummins is forecast to start the production of its major new engine QSK95 in 2015. It already boasts of having secured some key customers in commercial marine, rail and power generation markets. Cummins also plans to introduce its innovative V8 light duty engine in the unique Nissan type pickup truck which is believed to go into production by the year end.
Better demand will power growth
The forecast expansion in the customer demand for industry trucks and key power generation equipment highlights the solid hold of Cummins in these key growth markets which is expected to significantly benefit the technology major, going forward.
Cummins also recorded extraordinary growth in total revenue for the quarter, allowed by solid domestic performance and an impressive export performance.
The analysts at MarketWatch remain moderately bullish on Cummins Inc. and suggest a Buy rating for the stock looking at the mildly poor valuation levels and the significant growth opportunities for the company in this expanding greed for power.
Conclusion
Overall, investors are advised to invest in Cummins Inc. looking at the impressive company valuation with the trailing P/E and forward P/E ratios of 15.62 and 12.56 respectively, indicating improvement in the company operations. The PEG ratio of 1.01 depicts healthy company growth. The profit margin of 8.59% is appealing for the investors. Moreover, Cummins solid balance sheet with total cash of $2.39 billion is much above its total debt position of $1.68 billion, giving it further room for executing key strategic investments.
