3 Reasons Cummins Inc. Shares Could Zoom Next Week

These three key metrics in Cummins' upcoming earnings report could decide where the shares head next.

Apr 25, 2014 at 6:00PM

Cummins (NYSE:CMI) shares have had a remarkable run since February, tacking on 11% since a bunch of analysts upped their price targets after a solid set of fourth-quarter numbers from the engine maker.

So with its first-quarter earnings report arriving early next week, is another surprise in store for Cummins investors? Situations look favorable, what with key customer PACCAR (NASDAQ:PCAR) projecting a 5% jump in its Q1 truck deliveries and long-standing partner Westport Innovations (NASDAQ:WPRT) even calling 2014 the "breakthrough year in heavy-duty trucks in North America."

But while Cummins' top- and bottom-line figures may impress, here are three key metrics that you should watch in the earnings report scheduled for Tuesday, April 29, to help you decide your future course of action.

Hold over the market
For a company that's known for its engines worldwide, maintaining market share remains a top priority. Cummins' projections during its last earnings call gave investors a lot to think about -- it expects to capture 38% market share in the North American heavy-duty truck engine market this year, while hitting the 70% mark in the medium-duty segment. Put better, the company expects its heavy-duty share to drop a percentage point, while its medium-duty share climbs 10 percentage points compared to 2013.

Pcar Kenworth Isx

PACCAR Kenworth trucks powered by the ISX 12G engines. Source: PACCAR

While a 70% share in the medium-duty market should make any investor drool, it's worth noting how PACCAR's new 13-liter engine is proving a tough nut for Cummins, especially as it tries to build a market for its 12-liter engine, made in partnership with Westport Innovations. The ISX 12G was launched only last year, so 2014 will essentially be the year that decides whether the engine can taste success. Naturally, if PACCAR's engines distract customers, that doesn't bode well for Cummins or Westport.

So in Cummins' upcoming earnings call, keep an eye on two things: Whether the company reiterates its market share projections and whether it provides any further insight into how PACCAR's growing engines business could affect its own sales. These should be critical pieces of information for any long-term Cummins investor. For the near term, though, the market should applaud if Cummins maintains its market share targets next week.

Are margins growing?
Analysts project Cummins' Q1 earnings per share to climb 17% year over year on 6% higher revenue. While that suggests improved margins, the company's margins, interestingly, aren't expanding as expected. For 2014, Cummins previously projected its revenue to grow between 4% and 8%, but expects a small 0.75% improvement in operating margin (to 13.25%) even at the higher end of the range.

In fact, I'm expecting the company's Q1 operating margin to drop slightly year over year on weaker seasonal sales of high-horsepower engines to mining and power-generation industries. Considering that Cummins missed its margins target last year, its projections for 2014 are anyway on the conservative side. Naturally, a substantial drop in margins in Q1 could put tremendous pressure on the company's bottom line as the year progresses. So keep an eye on where Cummins' margins are headed. Any positive signal could send share higher next week.

How much can you earn out of Cummins?

Cummins Dividend Per Share History

Cummins' dividend per share history. Source: Company financials

If you don't know how much cash flow a company is generating, you'll probably not know what returns to expect as its shareholder. Cummins generated record operating cash flow worth $2.1 billion last year. While reinvesting a part of it into its business, Cummins plans to return 50% of that cash to shareholders in the form of dividends and buybacks.

So if the company projects higher cash flows for 2014, you can expect greater returns. Cummins increased its dividend by 25% last year, and greater cash flow could mean another hike this year. So make sure you don't miss what the company has to say about its cash flows and how it plans to use them in its upcoming earnings report.

The Foolish bottom line
Cummins is continuously designing products that meet stricter emission standards across the globe. China, for instance, presents a massive opportunity for 2014 on the heels of the NS IV emission norms. So Cummins' product pipeline for the year, which should be discussed in length in its upcoming earnings call, could reveal a lot about how well it is poised to tap those opportunities. And that's where investors should focus, instead of reading much into whether the company misses or beats Street estimates next week. Stay tuned for more analysis on Cummins' earnings and its future plans.

How to profit from the energy boom while saving taxes
While Cummins has to wait for a pickup in the adoption of natural gas as an alternative fuel to see its profits zoom, some companies are poised to benefit tremendously from just the record oil and natural gas production in the United States. But did you know that you can profit from those companies and even save some taxes? Yes, it's possible. The Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn all about this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report now -- it's absolutely free. 

 

Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends Cummins, Paccar, and Westport Innovations. The Motley Fool owns shares of Cummins, Paccar, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers