Cummins (CMI, Financial) recently reported its results for the first quarter 2015. The company posted mixed results with revenue improving marginally on one hand and the profit falling short of consensus estimates on the other. The improvement in the revenue was mainly driven by strong demand in North America and the acquisitions it made in the past. However, investors are cautious about its prospects.
The company is prone to currency fluctuations, which also hurt it in the recently reported quarter. The declining performance in the international markets is also a reason for worry to Cummins. The management is well aware of this headwind and is taking various initiatives that could help it lift its performance in future. Let us have a look.
Quarterly performance
Cummins reported quarterly revenue of $4.7 billion which is a good 7% increase as compared to the revenue it posted in the same quarter last year. The performance of the company was largely impacted by the solid 17% growth in sales in North America. But a 6% decline in the international needs attention. However, after these improvements, the company disappointed the investors on the earnings front. It posted EPS of $2.04 falling shy of consensus estimates of $2.12 per share.
Cummins looks in perfect shape. The company with good financial performance looks promising in the long term. There are some key factors and initiatives that the company undertook in the past that are paying off for it now. Cummins is expecting better synergies in the future with the distributor acquisition strategy. Cummins is worried about its declining international performance. Its international sales declined by 6% in the recently reported quarter. But, the company is now advancing to improve its international performance.
Growth drivers
It is seeing growth opportunities in China; hence it is focusing on bringing in new products that will help its Power Generation business to grow and contribute well to its bottom line. In addition, this initiative will also help Cummins to offset weak demand in other international markets.
Moving ahead, Cummins is largely counting on North America as it is the key growth market for it. The revenue in North America alone improved by 17%. Its distributor acquisition strategy is the major contributor behind this growth. Its business deal with Navistar corp. is looking strong, and the company is thinking that it will make better profits by supplying pollution reduction components. Cummins has left a good mark in the market with 33% market share in the first quarter. If the company continues to grow with the same pace, Cummins is expecting the market share to grow by 36% by the end of this fiscal year.
While the company is enjoying the positive growth signs, there are some headwinds also that Cummins is likely to face. It has lowered its full year production guidance as it is expecting a 28% decline in the upcoming fiscal year. This is because Cummins is anticipating weak demand in high horsepower markets, including mining and power generation.
Conclusion
Now looking at its fundamentals, the stock looks reasonable with a trailing P/E of 15.64 while the forward P/E of 12.75 shows good earnings growth in the near term. The stock can also gain market share because of decent profit margin of 8.41%. Considering all these facts and valuation levels, Cummins is definitely a good pick as of now and the investors should definitely count on it.
