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.
Currently 0.00/5
Harley-Davidson's Heavyweight Motorcycles Aren't Leading The Parade On Wall StreetIt's the Fourth of July! And almost all of the holiday fun-seeking Americans are out on the road to enjoy the festivities of the highly valued Independence Day. Practically every major road and highways have been teeming with all types of vehicles for them to celebrate this revered and most popular national holiday. The usual roar of motorbikes, for one, led by the No. 1 of them all, the Harley-Davidson power motorcycles, continue to lead all kinds of parades or road activities in most towns and cities. But despite Harley's globally popular Hog and its other motorbikes, shares of this maker of major heavyweight motorcycles haven't been leading the parade on Wall Street, where the stock market has been operating on all cylinders, with the Dow Jones industrial average and S&P 500-stock index hitting multiple all-time record highs this year. Shares of Harley have slumped to $68.75 a share on July 2, 2014, down from $73.23 on April 30, 2014, in part due to dire forecasts of sales prospects ahead. The drop in Harley-Davidson's stock price has surprised investors because the stock market has been on a tear. The motorcycle leader's stock had been expected to join the market's big rally this year. But the one big reason behind the stock's retreat: Worry about a softening in motorcycle sales worldwide. "We now see a somewhat heightened level of risk in the near term, given recent indications of sluggish year-to-date motorcycle industry retail trends that appear essentially flat," warns Scott Hamann, analyst at KeyBanc in a note to clients. He has downgraded Harley-Davidson to a hold from a buy, and removed his price target of $80 a share. One major source of concern is the continuing weakness in the European market. "Near-term results could be weighed down by economic weakness in Europe," says Efraim Levy, analyst at S&P Capital IQ, who recently reiterated his recommendation of a "Hold" on Harley-Davidson's stock, even as he continues to hold a positive outlook for long-term sales growth. In fact, Levy expects revenues rise this year by 12% and by 8.5% in 2015. "We have a positive view of Harley-Davidson's cost-cutting efforts," adds Levy, and the company's solid balance sheet. Still he and other analysts aren't inclined to minimize the potential risks involved in the sluggish European market and how that could hurt motorcycle sales should the situation dampen the global economic recovery. Expanding its operations internationally is one of the company's major objectives. It expects to open 100 to 150 new dealerships from 2009 through the end of this year. Through the end of December 2013, Harley-Davidson has added 118 new international dealers.  Harley Davidson (Photo credit: racin jason) The company may have to re-study and revise the timing and schedule in its international expansion plans in light of the weak forecasts for sales in Europe. Although "we feel the stock has worthwhile total return potential out to 2017-2019," says Alan G. House of investment research firm Value Line, "conservative accounts should note, however, that the company is susceptible to economic downturns, as is evidenced by its subpar Earnings Predictability score (in Value Line's ranking system)." Value Line ranks Harley-Davidson only No. 3 in its Timeliness and Safety metrics. In the meantime, however, the analyst expects Harley-Davidson's profitablity will continue. He sees the company earning $3.90 a share in 2014 on projected revenues of $6.5 billion, and $4.50 a share in 2015 on estimated sales of $7 billion. In 2013, Harley-Davidson earned $3.28 a share on revenues of $5.8 billion. The company has about 30 models of Harley-Davidson heavyweight motorcycles, with U.S. manufacturer's suggested prices ranging from $249,849 in 2012 and $235,188 in 2011 — but still below the high of $303,479 in 2008. The company manufacturers five families of Harley-Davidson brand motorcyclces: Sportster. Dyuna, Softtail, Touring, and VRSC. Scarred Reputations Costing Financial Firms BillionsSix years after the financial crisis, financial services firms are still burdened by reputational and customer service issues, according to a survey released Tuesday by the communications firm Makovsky. Eighty-one percent of communications, investor relations and marketing executives surveyed said the financial crisis continued to strongly affect stakeholder perceptions of their firms. The study showed that this negative perception was taking an even bigger toll on sales, as the firms interviewed reported an average business loss of 27% — equaling billions of dollars — in the last two years as reputational and customer service issues persisted. This average loss was significantly higher in the past 12 months than reported in the 2013 study, according to Makovsky. “The financial crisis has left scars and those scars may be permanent,” Makovsky executive vice president Scott Tangney said in a statement. Firms in the survey complained of constant reputation and customer satisfaction issues related to trust, regulation, products, liquidity and capital, financial performance and compensation, Tangney said. “The standing of many has been diminished, with nearly half of executives telling us that the crisis fallout made their firm competitively vulnerable, allowing their closest or direct competitors to gain an advantage.” For the study, Ebiquity, a research firm, in May interviewed 225 executives and managers responsible for the management and supervision of communications, investor relations or marketing at banks, brokerages, asset management firms, insurance companies, real estate companies, credit card companies, mortgage lenders, venture capital firms, credit unions and financial technology firms. The study found that improving reputation had become a chief priority at financial services firms, especially as negative perception was having a greater effect on revenue loss. Tangney said it would take up to five more years to restore firms’ reputations to pre-crisis levels. Researchers asked executives at financial firms to rank the issues that had negatively affected their organizations over the last 12 months: The importance of each of these issues had increased compared with last year’s results, Makovsky said. In addition, 52% of the firms surveyed said financial performance and excessive bonuses had dragged on their reputation in the past 12 months. And 50% reported that customer dissatisfaction and corporate governance were negatively charged issues for their firm. Respondents said their greatest reputational challenges in the next 12 months would be: --- Related on ThinkAdvisor: Just give me a framework (Bloomberg News) The bottom line: 1. The War Against Inflation initiated against inflation by Volcker in 1979 is over, done, finished; we won some 15 years ago. Accordingly, the secular Fed strategy known as “opportunistic disinflation” is dead, along with its companion cyclical implementation strategy of “pre-emptive tightening.” 2. Winning that War was, ironically, a Pyrrhic victory, to the extent it fostered irrational belief in the staying power of the Great Moderation, setting in motion debt dynamics that gave birth to the Minsky Moment, which ushered in a Liquidity Trap. 3. The Fed has appropriately and mightily fought to escape the Liquidity Trap ever since, employing a mosaic of policies in a “responsibly irresponsible” fashion. 4. These polices have worked. Escape from the Liquidity Trap nears, with the heavy lifting having been done by endogenous delevering of private sector balance sheets through the alchemy of rising bond and equity prices and valuations, which are fundamentally grounded in structural reduction in the central bank's neutral real policy rate. Escape Valuations beget Escape Velocity, not the other way 'round! 5. Both bonds and stocks are presently in secular zones of “fair” valuation. Not cheap, but not rich. And definitely not “artificial!” 6. Long live The New Neutral!How he gets there Last weekend, after the whirlwind of the first week in my new job at Pimco, I reread all my essays written during my previous incarnation here – some 120 of them. Yes, I have masochistic tendencies, which I will explore with my therapist, in hope those tendencies haven't advanced to a disorder. Don't think so, as I was simultaneously listening to Pink: Just Give Me a Reason! It was a very useful exercise, in part to remind myself of what I said and when I said it, so as to faithfully own my priors going forward. Not that I don't have the right to change my mind. I am a devout believer of Keynes' dictum that when presented with new information, a person has not just the right but the duty to change one's mind. Or in the famous words of Ralph Waldo Emerson, a foolish consistency is the hobgoblin of little minds. Pimco is not a little-minds place, but rather a right-answer-wins place. And getting the right answer is often about being willing to openly recast one's view of how the world works, in the context of one's prior view, rather than passively dismissing it. There is no shame in recognizing new realities, only in refusing to do so.WAR REMEMBRANCES In rereading my work of the first decade of this century, what struck me most was one unifying theme for the economy, policymakers and the markets: declaring victory in the War Against Inflation launched by Federal Reserve chairman Paul Volcker in October 1979. Many of my new colleagues weren't even born when that War started! I could – but won't! – go through the gory (wonky!) details of that War's campaign. Suffice it to say that for two decades after Mr. Volcker's initial assault, the Fed fought a secular campaign against inflation with a cyclical strategy called “opportunistic disinflation.” This strategy rejected the notion that the Fed should deliberately induce recessions to reduce inflation, but rather called for the Fed to “opportunistically” welcome recessions when they inevitably happened, bringing cyclical disinflationary dividends.A corollary of this thesis was that the Fed should preemptively tighten in recoveries, on leading indicators of rising inflation, rather than rising inflation itself, so as to “lock in” the cyclical disinflationary gains wrought by the preceding recession. Former Philadelphia Fed president Edward Boehne elegantly described the approach at a Federal Open Market Committee meeting in late 1989: “Now, sooner or later, we will have a recession. I don't think anybody around the table wants a recession or is seeking one, but sooner or later we will have one. If in that recession we took advantage of the anti-inflation (impetus) and we got inflation down from 4 1/2% to 3%, and then in the next expansion we were able to keep inflation from accelerating, sooner or later there will be another recession out there. And so, if we could bring inflation down from cycle to cycle just as we let it build up from cycle to cycle, that would be considerable progress over what we've done in other periods in history.”VICTORY AND FEEDING MINSKY Opportunistic cyclical victories in the War Against Inflation became secular victory in the recession that marked the end of the century. The anti-inflation dog finally caught the price-stability bus. Indeed, a favorite day in history for me is May 6, 2003, when the FOMC, struggling to fuel faster recovery from the preceding “opportunistic” recession, formally declared victory (my emphasis): “[T]he probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. The Committee believes that, taken together, the balance of risks to achieving its goals is weighted toward weakness over the foreseeable future.” Unwelcome. Yes, the FOMC declared, for the record, that any further fall in inflation would be unwelcome. There was no place lower for inflation the Fed wanted to go, and was worried that if the cyclical economic recovery didn't get faster traction, deflationary pressures would emerge. At the time, the core CPI was running at a 1.5% year-over-year rate; it troughed a few months later that year at 1.3%. And with that secular victory in the long War Against Inflation, not only did the doctrine of “opportunistic disinflation” die, but also its companion cyclical implementation strategy of “preemptive tightening.” What's more, policy errors “on the side of tightness” would no longer carry welcome disinflationary silver linings. They would be mistakes! Glowing with victory, the Fed celebrated the notion that it had fostered a Great Moderation, with long expansions and short recessions, a nirvana land of low cyclical economic volatility in the context of secular price stability. Concurrently, the Fed moved into a world of forward guidance, initiated with the FOMC telling the world explicitly, on August 12, 2003, that it would remain accommodative for a “considerable period” into recovery. Without saying so explicitly, because it would have bee! n politically incorrect to do so, the FOMC, by its subsequent actions, endorsed the notion that it would be acceptable for inflation to pick up somewhat in the unfolding expansion, in part simply to cut off the fat tail of deflation risk that had become all too real in the preceding recession. And, to be fair to the FOMC, the next recession, now known as the Great Recession, was not the result of excessive Fed zeal in cyclically fighting inflation. Where the Fed sinned, and indeed the whole mosaic of financial policymakers sinned, was failure to recognize that the whole concept of the Great Moderation would feed into Hyman Minsky's Financial Instability Hypothesis! As both private sector players and policy players believed and acted on the great moderation thesis, their very acts of doing so destroyed its viability, on the back of ever-more-risky private sector debt arrangements – from hedge to speculative to ponzi debt units, incubated in the explosively growing, barely regulated Shadow Banking System. And then the Minsky Moment hit in 2007–2008, ushering in a liquidity trap.LIQUIDITY TRAP EXIGENCIES For the last half decade, the Fed – in weakly coordinated tandem with other policy authorities – has been using all available tools to escape the liquidity trap, following Paul Krugman's doctrine of acting irresponsibly relative to orthodoxy. Yet, it is hugely important to stress that at no time since entering the liquidity trap over five years ago has the Fed had to give a moment's worry about inflation. To be sure, the FOMC has had to rhetorically beat back nattering nabobs of antiquated monetarism, who see the Fed's “bloated” balance sheet as inherently evil, the moral equivalent of a very fat man in Speedos: wrong, just wrong! But, as a practical matter, the Fed has not had to worry about accelerating cyclical inflation, but rather about the risk of unrelenting “unwelcome” (to borrow a word from 2003) disinflationary pressures. There is absolutely nowhere lower the Fed wants inflation to go, period. The FOMC actually wants it to go higher! Yes, I hear some of you retorting: But what about asset price inflation? Answer: That's a good thing! The decisive dynamic behind the Fed's story of success has, in my view, actually been soaring equity prices and valuations, both publicly traded and private. How so? Equity capital gains are the only asset that does not have a corresponding liability. Thus, soaring equity prices and valuations endogenously heal private sector balance sheets that have too much debt and too little equity. Simple example: If a homeowner has negative equity on his house, there are two ways to fix it. The bank can haircut the mortgage to “restore” equity, or the market value of the house can go up –“recover” would be the polite word – above the value of the mortgage. Moralists would argue for the former; enlightened macro policymakers try to engineer the latter. I use this example as but an example, as it is easy to understand. But the principle applies on an economy-wide basis. Capital gains –! ; whether realized or not! – work to delever over-indebted private sector balance sheets, the fundamental cancer of a liquidity trap. But are those gains sustainable?THE NEW NEUTRAL! Let's start with the bond market. The Fed's policy rate anchors the yield curve: the yield on cash, which always trades at par. Logically, if you are going to give up the certainty of real-time par, locking up your money for a longer period than tomorrow, you want to earn a higher yield than on cash. That's called a term risk premium, as longer-dated bonds don't always trade at par, like cash does. You also want to be thinking about how the Fed might change the rate on cash in the future; you certainly wouldn't want to blindly lock up your money now at a risk premium over today's yield on cash if you expected the Fed to hike cash yields in the future. Thus, the slope of the yield curve can be summarized as a forward curve on the Fed's future policy rate, plus a risk premium. It's that simple (though the math can be very complex, especially in computing risk premiums, which are connected to current and expected volatility). The bond market is “fairly” valued when the yield curve captures sensible expectations on both scores: expected Fed policy and expected volatility. But what about inflation, you ask; shouldn't the bond market reflect expectations on that score, too? The fact of the matter is that those expectations have been “well-anchored” ever since the War Against Inflation was won at the
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