Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Cummins Roars Ahead

A significant drop in demand for diesel engines in the U.S. is proving to be nothing more than a speed bump for Cummins (NYSE: CMI  ) . On Thursday, the manufacturer of heavy-duty truck engines reported strong sales and net income in the third quarter, thanks to the boom in mining and construction overseas.

But earnings came to $1.84 per share, not the $1.93 expected by analysts, sending the stock down about around 12%, and presenting a potential buying opportunity for interested Fools.

The biggest surprise this year may be that the company is doing well, despite taking a major hit in its bread-and-butter product, big diesel engines. Shipments of the biggest of the big engines were off 27% year over year, because of "pre-buys" in 2006.

In short, customers like Mack Trucks, owned by Volvo AB (NYSE: VOLV  ) , bought engines in 2006 to avoid having to buy cleaner but less proven models required by new 2007 U.S. emissions standards. Other truck makers like Freightliner, owned by Daimler (NYSE: DAI  ) , and Peterbilt and Kenworth, owned by PACCAR (NYSE: PCAR  ) , did the same. Since these heavy-duty engines were historically big moneymakers, this gave Cummins a great year in 2006, but raised questions about 2007.

The last time Cummins took a major hit in the diesel engine business was 2001. Shipments dropped 44%, and Cummins hit a pothole. The company lost $2.66 per share, including taxes related to restructuring and asset impairment.

So what's the difference this time? Cummins is now firing on more than one cylinder. Sales of medium-sized and light-duty truck and bus engines, for example, rose more than 40%. And like rival Caterpillar (NYSE: CAT  ) , Cummins has benefited from the booming global economy.

International markets have especially revved up the power generation business, which makes generators of all sizes, including monster units used to power whole factories. Sales in the power-gen line rose 24% in the third quarter, and EBIT jumped more than 45%. Sales in the components business, which makes fuel systems, emissions equipment, and the like, grew 31%, but EBIT margins were only 4.6%, not the 7% the company has targeted.

Overseas markets have more than offset declines in North America, and these higher volumes have helped expand the gross margin, which, despite slipping to 19% in the latest quarter, still represents a big improvement over 17.8% during the downturn in 2001.

So with Cummins no longer so dependent on big sales of big engines, are earnings potholes a thing of past? Not likely. But in the meantime, if emerging markets and other regions continue to grow as they have in recent years, Cummins' other business lines could help keep the wreckage to a minimum.

For related Foolishness:

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 539369, ~/Articles/ArticleHandler.aspx, 10/25/2016 1:27:40 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,180.71 -42.32 -0.23%
S&P 500 2,145.24 -6.09 -0.28%
NASD 5,282.69 -27.14 -0.51%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 1:11 PM
CMI $125.54 Down -1.15 -0.91%
Cummins CAPS Rating: *****
CAT $84.67 Down -1.32 -1.54%
Caterpillar CAPS Rating: ***