A Few Reasons to Invest in Cummins

Cummins (CMI, Financial) recently announced third-quarter 2014 revenue of $4.89 billion, exceeding the average analyst expectation of $4.71 billion, according to Zacks Investment Research. The company expanded its full year 2014 revenue forecast in 10% to 12% growth range, an increase from its previous growth forecast in 8% to 11% range owing to a solid North American demand. Net income for the quarter was $423 million, or $2.32 per share.

More progress expected

The solid demand in North America’s on-highway markets led to 19% growth in the company revenue. The shipments in the heavy-duty truck market for North America also crossed 26,000 units during the third quarter, up from 32% in 2013. This significant increase in the 2014 shipments illustrates solid demand for the company products and paves the way towards impressive growth going forward.

Some key customers such as Navistar International Corp. and Paccar Inc. are witnessing solid demand increase for many more trucks encouraged by the ramping North American market.

At present, Cummins estimates the full-year market size to expand by nearly 22%, an increase from its earlier growth forecast of 15%.

A closer look at the end markets

In the medium-duty truck market, Cummins produced approximately 18,400 engines during the third quarter, an increase of 15% over last year. This production expansion is in line with the company’s growth forecast for the year and expects the truck market to expand by 9% in the year, very similar to its previous forecast. Year-to-date, Cummins market share is 73% and believes to retain this market share for the entire year, 10 points over the 2013 level.

Cummins increased the shipments to Chrysler by 6% during the third quarter on year-over-year basis and further expects to expand the complete year shipments also by 6%.

In addition, Cummins is witnessing an ongoing enhancement in some of its greater horsepower engine markets. This is further supported by the improving market conditions globally.

Cummins is also seeing solid demand in the commercial Marine market for the offshore gas and oil industry. However, the mining engines demand is still extremely weak both in the U.S. markets and internationally with shipments for units forecasted to fall by 20% during the entire year.

The higher demand in the commercial Marine market coupled with significant orders from key gas and oil customers and higher demand of data centers in the U.S. for the company’s power generation business led to 11% rise in worldwide superior horsepower engine shipments during the third quarter after approximately two years of continued poor demand. This can be considered to be a major milestone in the company’s history.

According to the CEO Tom Linebarger, the company’s Power Generation business enhanced during the third quarter even after the worldwide power generation equipments demand remained poor.

Consequently, Cummins targets on some major cost cutting efforts during the fourth quarter which should definitely enhance its earnings in the quarter.

However, year-tol-date, complete industry sales declined 3%, and Cummins currently estimates the complete-year market size to fall by about 5% in line with its earlier forecast. This will negatively affect the company’s margins going forward.

The light duty engine shipments in China expanded by 94% on year-over-year basis, although the market demand in general fell by 28% with its partner Foton raising the trucks ratio propelled by the 2.8 and 3.8 liter engines developed in its joint venture.

The production of its innovative ISG heavy-duty engine developed in a joint venture with Foton is expanding and is believed to contribute significantly to its market share growth for the fourth quarter.

Conclusion

Cummins is moving in the right direction to expand its market share and improve its long-term performance. Therefore, investors should definitely consider this stock for the long run.