Cummins Inc.
NYSE: CMI
We rate a Cummins
Inc. BUY.
COMPANY DESCRIPTION
Cummins Inc. (CMI) is a leading global designer,
manufacturer and distributor of diesel and natural gas engines, electric power
generation systems, and engine-related components, fuel systems, controls and
air handling systems. Headquartered in Columbus, IN, the company serves
customers through a network of 500 company-owned and independent distributor
facilities over 7,500 dealer locations in more than 190 countries and
territories.
Cummins has the following four operating segments:
The Engine segment (34% of consolidated net sales in 2017) produces engines and parts for sale to customers in on-highway and industrial markets. The engines are used in trucks, buses, recreational vehicles and various industrial applications such as construction, mining, agriculture, marine, oil and gas, rail and military.
The Power Generation segment (16%) sells engines, generator sets and alternators, and rents power equipment for both standby and prime power uses. The power generation products are organized around the Power products, Power systems, Alternators and Power Solutions businesses.
The Components segment (23%) has four businesses: Cummins Filtration, Cummins Turbo Technologies, Cummins Fuel Systems and Cummins Emission Solutions. Under the filtration business, the company supplies filtration, exhaust, coolant and chemical products. Turbo technologies design, manufacture and market turbochargers for commercial and light-duty diesel applications.
The Distribution segment (27%) includes wholly- and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts. It also includes servicing and repairing the company’s products and maintaining relationships with OEMs globally. The company’s distributors serve a diverse customer base with 43% of revenues coming from the wholesaling of new power equipment and the remaining generated from parts and filtration and service repairs.
Cummins has the following four operating segments:
The Engine segment (34% of consolidated net sales in 2017) produces engines and parts for sale to customers in on-highway and industrial markets. The engines are used in trucks, buses, recreational vehicles and various industrial applications such as construction, mining, agriculture, marine, oil and gas, rail and military.
The Power Generation segment (16%) sells engines, generator sets and alternators, and rents power equipment for both standby and prime power uses. The power generation products are organized around the Power products, Power systems, Alternators and Power Solutions businesses.
The Components segment (23%) has four businesses: Cummins Filtration, Cummins Turbo Technologies, Cummins Fuel Systems and Cummins Emission Solutions. Under the filtration business, the company supplies filtration, exhaust, coolant and chemical products. Turbo technologies design, manufacture and market turbochargers for commercial and light-duty diesel applications.
The Distribution segment (27%) includes wholly- and partially-owned distributorships engaged in wholesaling engines, generator sets and service parts. It also includes servicing and repairing the company’s products and maintaining relationships with OEMs globally. The company’s distributors serve a diverse customer base with 43% of revenues coming from the wholesaling of new power equipment and the remaining generated from parts and filtration and service repairs.
RECOMMENDATION
We rate a Cummins
Inc. BUY. Below are the basic reasons
to recommend this stock as a BUY.
·
Cummins has provided a positive guidance for
fiscal 2018. It anticipates revenue growth of 10-14% compared with the prior
outlook of 4-8%. EBIT is expected to be 15.4-15.8% compared with 15% recorded
in 2017. The company is poised to benefit from its mining, oil and gas and
power generation markets in 2018 and expects high profitability based on higher
sales and its cost reduction initiatives. In first-quarter 2018, the company’s
revenues went up 21% to $5.6 billion, driven by increased demand for trucks,
construction and mining equipment, increased sales in North America and
international markets.
·
Cummins focuses on introducing innovative
products and strategies such as partnerships to record high returns. Recently in
May 2018, the company announced the formation of a 50:50 joint venture with
JAIC Motors to develop fuel-efficient and high-quality products. Earlier in
October 2017, Cummins collaborated with GILLIG to focus on combining and
modifying new battery electric technology that it developed. The facility will
be used for the latter’s zero-emission transit buses. In August 2017, the
company unveiled its plant to develop a Class 7 heavy-duty electric truck. The
truck will feature an advanced 140 kWh battery pack and will be sold to bus and
commercial truck operators from 2019.
·
Cummins is poised to gain from acquisitions. In
sync with its aim to be a leader in electrified power, the company announced
the acquisition of Efficient Drivetrains, Inc., in July 2018 which is expected
to complete by the third quarter. Earlier in January 2018, the company
announced its plan to acquire the automotive battery business of United
Kingdom’s Johnson Matthey. This acquisition will enable Cummins to expand its
electrification and energy storage capabilities. Prior to this in October 2017,
Cummins acquired battery pack expertise and resources of Brammo.
· Cummins
is focused on enhancing the shareholder value by pursuing aggressive share
repurchases and increasing dividend payouts. In first-quarter 2018, the
company’s board approved a dividend payment of $1.08 for its shareholders. In
2017, the company achieved its target of returning 50% of its full-year cash
inflow from operations to shareholders through dividends and share repurchases.
Further, the same target has been set for 2018 as well.
· Cummins'
operational start to 2018 was successful: the company recorded sales growth of
21% year over year during the first quarter. All the company's segments
(Engines, Distribution, Components, and Power Systems) saw double digit sales
increases. This trend is likely to persist, as Cummins' short- as well as
long-term outlook is positive.
LAST EARNINGS REPORT
Cummins Surpasses Q1 Earnings & Revenue
Estimates
Cummins
reported adjusted earnings of $3.30 per share in first-quarter 2018, surpassing
the Consensus Estimate of $2.91. The company’s earnings per share were $2.36 in
the year-ago quarter. Excluding tax charges, net income was $403 million in
first-quarter 2018.
Revenues
improved 21% year over year to $5.57 billion in the reported quarter. The top
line also surpassed the Consensus Estimate of $5.17 billion. The year-over-year
rise was owing to strong demand for trucks, construction and mining equipment.
Operating
income decreased to $530 million from $540 million a year ago. Earnings before
interest and taxes (EBIT) were $700 million (12.6% of sales) compared with $705
million (15.4% of sales) a year ago.
Financial Position
Cummins’ cash
and cash equivalents decreased to $1.21 billion as of Apr 1, 2018, from $1.37
billion as of Dec 31, 2017. Long-term debt totaled $1.57 billion as of Apr 1,
2018, a slight decline from $1.59 billion recorded on Dec 31, 2017.
At the end of
first-quarter 2018, Cummins’ net operating cash outflow was $117 million
compared with an inflow of $379 million in the same period last year. Capital
expenditures declined to $72 million from $81 million in the same time frame.
2018 Guidance
For 2018,
Cummins anticipates revenues to rise 10-14% compared with the prior outlook of
4-8%. EBIT is expected to be 15.4-15.8%, a decline from the previous projection
of 15.8-16.2%.
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