Cummins earnings buoy investors


Investors continue to be impressed with the financial performance of Columbus-based Cummins Inc., with the value of Cummins stock rising again Thursday after the company reported fourth-quarter and year-end earnings.

The company has shown its ability to manage costs and deliver solid profits even in difficult financial circumstances, and new trends indicate that tough markets are finally starting to improve, analysts said.

Cummins’ stock price closed at $150.14 Thursday, after reaching a 52-week high of $153.44 in the morning. Cummins stock finished up just more than 3 percent from its close of $145.68 Wednesday.

Since Cummins announced its 2015 year-end and fourth-quarter results on Feb. 4, 2016, when the day’s closing price was $97.57, the engine maker’s stock price has increased by $52.57, a nearly 54 percent increase in a 12-month span. Comparatively, the Dow Jones Industrial Average has increased about 26 percent over the past year.

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On Thursday, Cummins’ 2016 earnings report stated full-year revenues of $17.5 billion, an 8.4 percent drop from $19.1 billion in 2015. That fell within the 5- to 9-percent range of decline the company projected for the upcoming year when it announced its final 2015 results.

Fourth-quarter revenues of $4.5 billion in 2016 decreased 5.5 percent from the same quarter a year ago, from nearly $4.8 billion. That was an improvement from the first three quarters of 2016, as each experienced declines of 9 to 10 percent compared to the same period in 2015.

“Despite weak conditions in a number of our largest markets, Cummins delivered fourth-quarter results that were a little better than expected due to our strong market share in on-highway markets in North America and the benefits of our cost-reduction work,” Cummins Chairman and CEO Tom Linebarger said.

“We made significant progress in a number of our key initiatives in 2016, including executing our restructuring actions, completing the acquisition of our distributors in North America and continuing to invest in new products, all of which help position the company for profitable growth when markets improve. We also returned 75 percent of the company’s operating cash flow to shareholders, consistent with our plan for the year,” Linebarger said.

The company said in the earnings news release that the fourth-quarter revenue drop largely reflected lower commercial truck production in North America and weak global demand for industrial engines and power generation equipment. Revenues in North America decreased 13 percent while international sales improved by 6 percent, primarily due to increased revenues in China, the company said.

Fourth-quarter net income of $378 million ($2.25 per diluted share) increased from $161 million ($0.92 per diluted share) a year ago. However, the company incurred a $90 million restructuring charge during the same period a year ago, related mostly to severance costs for about 1,900 professional employees whose jobs were eliminated, and a $211 million charge for readjusting the value of its light-duty diesel assets because the company said it would not make as many of those types of engines as planned. Without those charges, the company’s 2015 fourth quarter revenue was $355 million ($2.02 per diluted share). The company also eliminated 100 additional jobs during the same period through attrition.

Wall Street had expected Cummins to deliver $1.99 per share in the fourth quarter of 2016, so the company beat expectations by a solid margin, said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons in Columbus.

Earnings before interest and taxes (EBIT) in the fourth quarter were $526 million, compared to $230 million a year ago (which would have been $531 million without the charges).

Cummins said in a news release that full-year revenues in North America decreased 12 percent and international sales decreased 2 percent, mainly due to foreign currency movements. Excluding the impact of the currency movements, international revenues increased 2 percent, with growth in China and India being offset by weaker demand in Latin America, the Middle East and Africa, the company said.

Full-year net income of $1.39 billion ($8.23 per diluted share) was just slightly off the $1.4 billion ($7.84 per diluted share) reported for 2015. Excluding impairment and restructuring charges, net income was $1.59 billion ($8.93 per diluted share) in 2015.

Full-year earnings before interest and taxes were $2 billion, compared to $2.1 billion in 2015. Excluding impairments and restructuring charges, EBIT for 2015 was $2.4 billion.

For 2017, Cummins is projecting full-year revenues to range from about the same in 2016 to down 5 percent because of the ongoing challenge of difficult markets. The company added that it expects first-quarter results to mark the low point of the year.

Linebarger told analysts during a conference call following the earnings release that for the first time in several years the company is starting to see signs of improvement in markets that have been challenging, and that he expects improvements in the future.

Cummins President and Chief Operating Officer Rich Freeland told analysts that as he talks to operators of trucking fleets, those companies are reaching the point of replacing vehicles, meaning new diesel engine orders are expected.

Fourth-quarter sales of light-duty and off-highway engines exceeded sales from the same period in 2015, although medium- and heavy-duty were down. Cummins shipped more light-duty engines in the fourth quarter than the same period of the prior year, and its light-duty shipments for all of 2016 bested 2015.

Segment performances

All four of Cummins’ business segments experienced fourth-quarter sales declines from the previous year, but each showed improvement from 2016’s third quarter.

Engine Business sales of $2 billion represented a 6.2 percent drop, but that was better than the 11.6 percent drop in the third quarter. The company said that on-highway revenues declined 9 percent largely because of a decline in commercial truck production in North America, but were somewhat offset by an 8 percent increase in on-highway sales.

Distribution Business sales of $1.7 billion reflected a 2.2 percent decrease, slightly better than the third quarter’s 3 percent drop. Weaker sales to off-highway markets and a 1 percent negative impact of a stronger U.S. dollar offset the 5 percent revenue growth attributed to acquisitions, the company said.

Sales of $1.2 billion by the Components Business fell 4.8 percent because the company said lower commercial truck production caused its North American revenues to fall and partially offset higher revenues in China. Comparatively, the business had a 7.8 percent drop in the third quarter.

The Power Systems Segment reported sales of $932 million, reflecting a 5.5 percent drop, because of lower power generation and industrial engine demand in many regions, the company said. The segment previously had a third-quarter revenue decline of 12.8 percent.

Analysts react

“It was a great report and (Cummins is) in the sweet spot of the economy, and I think we’ll continue to see improving fundamentals at Cummins,” said Craig Kessler, chief investment officer at Columbus-based Kessler Investment Group.

Cummins has recovered significantly after seeing its stock price drop from more than $140 in May 2015 to below $90 in January 2016, Kessler said. He said that he thinks the company’s stock price was tied too closely to oil prices, which contributed to the steep price decline, but the rebound is attributable to more than the cost of oil.

Kessler said he believes Cummins will benefit from economic growth in the industrial sector that he envisions, and anticipated infrastructure spending in the U.S.

DeDomenic said Cummins is pleasing Wall Street by maximizing profit margins through efficient cost management.

“Cost cutting has increased the profitability of the bottom line even though sales were down 6 percent year over year,” he said.

Analysts also are optimistic because Cummins international markets are getting stronger, particularly in China and Brazil, and expectations are that the North American market will rebound, DeDomenic said.

The Chinese market is rebounding after a four-year slump, which is important because Cummins has a significant presence in the country, said Mark Foster, chief investment officer for Columbus-based Kirr, Marbach & Co. Strong sales in China can provide balance when North American sales are down, he said.

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Wednesday’s close: $145.68

Thursday’s close: $150.14

Change: $4.46 (3.1 percent)

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“Despite weak conditions in a number of our largest markets, Cummins delivered fourth-quarter results that were a little better than expected due to our strong market share in on-highway markets in North America and the benefits of our cost-reduction work.”

— Cummins Chairman and CEO Tom Linebarger


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