Cummins (CMI), posted impressive results for the second quarter that ended June 29, 2014, driven by enhanced demand in the North American on-highway market for heavy and medium duty truck and bus. The shipment for the heavy-duty truck increased roughly 13% to 23,000 units and medium duty truck accelerated nearly 28% to 20,000 units as compared to the same quarter last year. Likewise, Cummins's component business grew a record high to 15% during the second quarter, leading its EBIT to inflate by 230 basis points to 14.5% on the back of higher volumes, lower warranty cost, and stronger cost control actions.
Performance and outlook
The maker of engines reported revenue of $4.84 billion during the second quarter, an increase of about 7% as compared to $4.53 billion in the same quarter a year ago. Also, the strong performance of the existing business powered by positive impact of the recent acquisition of distributors in North America guided its net income for the quarter increase nearly 8% to $446 million or earnings of $2.43 per share as against $414 million or earnings of $2.20 per share in the corresponding period last year. The Wall Street analysts were expecting earnings of $2.38 on the revenue of $4.83 billion.
In addition, Cummins has also raised its full year outlook. The company now expects full year revenue to grow by 8% to 11% in the fiscal year ending December 31, 2014, which is higher than its prior guidelines of 6% to 10% growth on sales. Also, its revenue for the component business is forecasted to increase by 12% to 17% this calendar year, which is approximately up by 2% at the midpoint, while EBIT is expected to expand between 13% and 14%, up about 25 basis points from the prior outlook.
More improvements ahead
The maker of engine looks to additionally deliver incremental revenue of $500 million from the potential acquisition it has made this year. Cummins remains on the track with its North American acquisition plan to execute 7 large acquisitions this year. It has already made 3 acquisitions so far this year and appears solid to accomplish the remaining by the year end. Additionally, the company expects its acquisition business to strengthen its earnings by about $0.30 per share, which is higher than its formerly declared guidance of $0.20 to $0.25 per share.
Meanwhile, Cummins expects its heavy-duty truck market share to increase by 15% this year, which is slightly up from the previous guidance of 12%. The company has total market share of 38% so far, while its medium duty truck market remains solid with enhanced market share of 73% this year so far. The company is expecting its medium truck market size to get improved by 3% by the end of the year, which is approximately 10% higher than the previous year 2013.
New products
Cummins is pleased with the performance of its existing and new products across the world due to effective control measures executed that led the product failure rate to remain at the very low level for the company. However, Cummins has realized higher demand for the NS4 products worldwide from the end user buyers therefore the company is engaged in transitioning its product from NS3 to NS4 standard that usually carry a higher warranty costs due to increasing complication on its new engine which is now integrated with the addition of OnBoard Diagnostics that could slightly pressurized its margins this year.
Nevertheless, Cummins is now producing more of the National Standard 4 products based on the emission regulation and standard suggested by the from the Ministry of Industry and Information Technology or MIIT. Further, the company expects around 50% to 60% of the total production for heavy and medium-duty truck in the second half of the year will be compliant with the NS4 products that will certainly keep them ahead from its peers such as Caterpillar (CAT) and Navistar International Corporation (NAV).
On the other hand, Cummins is witnessing strong demand for its light-duty engines in China. Cummins is operating its light-duty engine operation with the partnership of Foton and accelerating the proportion for its truck that are integrated with the 2.8 and 3.8 litters engine that are produced at its joint venture facility. Cummins is really excited with the potential growth in the Chinese market for light-duty vehicles that are further being supported by the emission regulation by the government should drive growth for its light-duty vehicles in the region.
The company has recently launched ISG heavy-duty engine in the country that should assist the company in complementing the growth for the light-duty market in the region. Also, the light-duty shipment during the quarter increased approximately 69% year-on-year basis in the region. Cummins is certainly in a right track to get the benefit of improving demand for construction market in china as investment in infrastructure has reenergized of late.
Conclusion
Cummins is currently trading with the trailing P/E of 17.22 and forward P/E of 12.88 that suggest reasonable growth for the stock in the future. Also, it's PEG ratio stands at 1.12 for the next five years, indicating potential growth for the company in coming years. Moreover, Cummins looks strong on the performance matrix as its profit and operating profit yields for the trailing twelve months are 8.68% and 10.26% respectively.
Cummins ROE also looks durable with the yield of 21.84% for the trailing twelve months. It has total cash of 2.38 billion and operating cash flow of 1.83 billion, quite enough to cover its total outstanding debt of 1.69 billion which is quite mix by most measures. In addition, the analysts have estimated CAGR of 14.07%, higher than average industry CAGR of 13.68% for the next five years. Hence, investors can certainly pick the stock as it has potential growth in the coming years.
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