Cummins Ready to Roar on a Solid Earnings Report

It's a critical week ahead for Cummins  (NYSE: CMI  ) investors. The diesel and natural gas engine maker will report its third-quarter numbers on Oct. 29, the same day as its largest customer, PACCAR (NASDAQ: PCAR  ) , releases its quarterly report. A day later, Cummins' key partner and natural gas technology leader, Westport Innovations (NASDAQ: WPRT  ) , will tell its investors about how it fared in the recent quarter.

Photo courtesy of Cummins

Needless to say, there'll be something for Cummins investors in each of these earnings reports. But to make sure they look for the right information in PACCAR's and Westport's numbers, it is critical to gauge what their company will likely deliver Tuesday. Here are the three important things investors should look for in Cummins' upcoming earnings report.

Order updates on the ISX 12G engines
The heavy-duty natural gas ISX 12G engine is one of the most awaited products from the joint venture between Cummins and Westport Innovations. The engine was launched in April this year, and has generated great response. According to Westport, new orders for the ISX 12G engine were the major factor behind the 25% jump in sales volumes from the venture during the second quarter; Q2 shipments from the venture climbed an impressive 38% year over year.

With Westport calling it "the strongest product that CWI (Cummins-Westport venture) has ever launched", investors can understand why the ISX 12G is such an important product for Cummins. Hence, investors should keep an eye on updates on the production and order flow for ISX 12G engines in Cummins' upcoming earnings call. Since Westport gives a detailed breakup of the performance of CWI, Westport's earnings report should also give investors a good picture of the future of the ISX 12G engines.

Engine shipments to North America
A strong North American market is critical for Cummins' growth since it accounts for nearly 60% of the company's engine division sales. During the second quarter, Cummins' engine shipments for the North American heavy-duty truck market declined 19% year over year but improved 12% sequentially. So the market is showing signs of revival after a slow period. If the sequential growth continues into the third quarter, it could signal better days ahead for Cummins.

Investors can take a cue from PACCAR, which expects its third-quarter deliveries to improve 1%-2% sequentially. The truckmaker's performance and projections are important for Cummins for three reasons. One, PACCAR ranks as Cummins' most important customer, accounting for more than 10% of its revenue. Two, PACCAR was among the first truck companies to opt for the ISX12G engines for its next-generation Peterbilt and Kenworth brand trucks. So the company should help build a market for the engines. Three, PACCAR enjoys nearly 40% of the U.S. natural gas powered, heavy-duty truck market. So its order books can be a good gauge for the future of natural gas as a fuel, which is also where Cummins' is banking for growth. With PACCAR reporting numbers around the same time as Cummins, investors should keep watch.

International markets and a new deal
More than half of Cummins' revenue comes from markets outside the U.S. During its second quarter, revenue from international markets dipped 4%, which offset some of the gains from a 7% improvement in revenue from the North American market. Europe and India are the weakest markets right now, while Brazil and China are going strong. In Cummins' upcoming report, investors should look for any signs of recovery in the weak markets. At the same time, any signs of slowdown in the stronger markets could make things difficult for Cummins going forward.

Aside from numbers, investors can expect a good deal of information about Cummins' recent deal with Nissan in its upcoming earnings call. Under the agreement, Cummins will supply its V8 Turbo Diesel engines to Titan pickups. It's a first for Nissan, but a huge opportunity for Cummins to get its ambitious light-duty engine into the market. Investors should pay attention, because this could be a game changer for Cummins.

The Foolish bottom line
Cummins' stock has tacked on a solid 33% since July. Analysts expect the company's third-quarter revenue and earnings per share to grow 13% and 6%, respectively, year over year. If Cummins hits those estimates, its investors should be a happy lot, because that kind of growth is good given the challenging market conditions. Cummins may also improve its outlook for the full year, which should give investors another great reason to keep the stock on their radar. Watch this space for a detailed analysis of Cummins' third-quarter numbers and outlook.

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  • Report this Comment On October 28, 2013, at 2:10 PM, Thinkerbus wrote:

    I would be cautious about the publicity being given to the CMI/WPRT ISX12G natural gas engine. Have recently visited major Kenworth and Cummins distributors and at this point, they have little knowledge of this engine or the market/orders for same (almost clueless from folks with boots on the ground). You would think with an April launch, these people directly in the distribution channel would not only know all pertinent details, but also have at least one engine on display. How does one sell these engines when the infrastructure is still being developed and the sales folks aren't fully tuned in???? Just a word of caution.

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