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Cummins (CMI) Q3 Earnings Beat Estimates, Outlook Raised

Cummins Inc. CMI reported earnings of $2.71 per share in the third quarter of 2017, was up from $2.02, earned in the year-ago quarter. Also, the bottom line surpassed the Zacks Consensus Estimate of $2.47.

Net income rose to $453 million from $289 million in the third quarter of 2016.

Revenues improved 26.2% year over year to $5.29 billion in the reported quarter. This figure also outpaced the Zacks Consensus Estimate of $4.79 billion. The year-over-year rise was owing to an increased demand for trucks and construction equipment in North America and China, plus an increased demand for products from global mining customers.

Cummins Inc. Price, Consensus and EPS Surprise

Operating income increased to $629 million from $384 million a year ago. Earnings before interest and taxes (EBIT) were $640 million (12.1% of sales) compared with $398 million (9.5% of sales) a year ago.

Segment Performance

Sales at the Engine segment grew 26% to $2.3 billion on the back of a 25% increase in on-highway revenues and 30% in off-highway revenues, resulting from an escalated demand in global truck and construction market. The segment’s EBIT increased to $229 million (9.8% of sales) from $89 million (4.8% of sales) a year ago.

Sales at the Components segment surged 34% to $1.5 billion owing to revenue growth of 45% in China and India in addition to 26% increase in North America. The segment’s EBIT was $217 million (14.2% of sales) compared with the year-ago figure of $148 million (12.9% of sales).

Sales at the Power Generation segment increased 23% to $1.1 billion, banking on increased demand for industrial engines from mining and oil and gas markets. The segment’s EBIT rose to $81 million (7.7% of sales) in third-quarter 2017 from $59 million (6.9% of sales) in third-quarter 2016.

Sales at the Distribution segment shot up 17% to $1.8 billion. Revenues benefited from the company’s acquisitions and divesting North America’s power generation rental assets. The segment’s EBIT plunged to $91 million (5.2% of sales) from $96 million (6.4% of sales) a year ago.

Financial Position

Cummins’ cash and cash equivalents increased to $1.3 billion as of Oct 1, 2017 from $1.1 billion as of Dec 31, 2016. Long-term debt totaled $1.6 billion as of Oct 1, 2017, a slight decrease in comparison to the Dec 31, 2016 level.

For the first nine months of fiscal 2017, Cummins’ net operating cash inflow increased to $1.5 billion from $1.3 billion in the same period a year ago. Capital expenditures declined to $282 million from $312 million within the same time frame.

Capital Deployment

Till the end of third quarter, Cummins has returned $913 million to shareholders in the form of dividends and share buybacks. The company is focused on enhancing the shareholder value by pursuing aggressive share repurchases and increasing the dividend payouts. The company is in line with its plan to return 50% of operating cash inflow in 2017.

2017 Guidance

For 2017, Cummins anticipates revenues to grow by 14-15% compared with the prior guidance of 9-11% rise in revenues. EBIT is expected in the range of 11.8-12.2%, almost unchanged from the previous projection of 11.75–12.5%. These expectations include the impact of the new Eaton Cummins Automated Transmission Technologies joint venture.

Zacks Rank & Other Key Picks

Cummins currently carries a Zacks Rank #2 (Buy).

Other top-ranked companies in the auto space include Daimler AG DDAIF, BorgWarner Inc. BWA and Ford Motor Company F. All stocks carry the same bullish rank as Cummins. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Daimler has an expected long-term growth rate of 2.8%.

BorgWarner has an expected long-term growth rate of 8.9%.

Ford has an expected long-term growth rate of 12.3%.

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