Why Cummins Inc. Shares Could Explode Next Week

Cummins (NYSE: CMI  ) shares have lost 4% over the past month after a strong first half, leaving investors wondering whether the stock has run its course. Investors maybe betting on the company's second-quarter earnings report coming up early next week, but will Cummins deliver another blowout quarter like its first one? That's possible, especially with Westport Innovations (NASDAQ: WPRT  ) projecting 2014 to be a big year for the heavy-duty truck market, and key customer PACCAR (NASDAQ: PCAR  )  expecting at least 8% higher Q2 truck deliveries.

Source: Cummins

But while Cummins' upcoming report should give you a good idea about where the company, and its stock, is headed, you need to look beyond its top- and bottom-line numbers to get the real picture. So here are three factors you should focus on next week.

Are margins under pressure?
Analysts see Cummins' Q1 earnings per share climb 8% year over year, backed by 7% higher revenue. While strong trucking fundamentals should boost Cummins' top line -- the company even raised its full-year revenue growth forecast to 6%-10% in Q1 from the earlier 4%-8% -- I'm going to pay attention to its margins.

Cummins projects its 2014 operating margin to improve only slightly, by 0.5% at midpoint, from 2013 despite the good top-line forecast. More importantly, Cummins kept its operating margin guidance unchanged in Q1 even as it raised its revenue outlook. While softer demand for high-horsepower machines from mining, oil and gas, and power generation industries could hurt Cummins' profits, I'll look for signs of any cost pressures in its earnings report, especially since the company missed its margin targets in 2013.

Will it continue to rule the market?
While Cummins engines already dominate the North American truck markets, the company unveiled interesting market share targets in its first quarter -- It aims to end 2014 with 38% and 70% share in the North American heavy-duty (HD) and medium-duty (MD) truck markets, respectively.

Cummins' 70% target share in the MD segment represents a whopping seven percentage point improvement over last year. The target looks achievable, thanks largely to two emission standards -- EPA 2013 and EPA 2014 greenhouse gas emissions -- taking effect within a short interval.

What investors really need to watch out for is Cummins' HD market share, which appears to have stagnated. At 38%, Cummins' market share will be a percentage point lower over 2013 even as the North American HD truck market is projected to grow 12% this year. To know what's going on in the HD side of Cummins' business, look for these two factors in its upcoming earnings call:

  • Updates on its ISX 12G engines, built in partnership with Westport Innovations, and launched last year
  • Any mention of PACCAR's MX-13 engines

Fair Oaks is transitioning its fleet to the ISX12G engines. Source: Cummins

Both Cummins and Westport are betting heavily on the 12-liter engine to make headway in the natural-gas transportation market. Investors became wary when Cummins didn't bring up the ISX 12G during its last earnings release. Thankfully, Westport Innovations plugged the gap soon after when it released its numbers.

Westport not only reported good fleet response and customer feedback to the ISX 12G, but also stuck to its forecast, projecting natural gas to penetrate 3%-5% of the North American Class 8 HD truck market this year. That's up substantially from 1.7% in 2013.

What's the game plan?
But while the ISX 12G engine is a key HD product for Cummins, PACCAR's new MX-13 engine is a clear threat. Diesel continues to be the preferred fuel choice among truckers, as evidenced by the minuscule share of natural gas in the market. Moreover, PACCAR's extension of its in-house engines to its fleet will mean reduced dependence on Cummins' engines. PACCAR currently counts as Cummins' largest customer. Investors may also recall how Cummins openly named the MX-13 as having the potential to eat into some of its market share earlier this year.

So will Cummins stick to its market share targets? And how does it plan to tackle the ever-increasing competition? You'll need to find that out from its earnings call next week.

Stay hopeful
Cummins confirmed its focus on shareholders when it increased its quarterly dividend by 25% and authorized another share buyback program worth $1 billion earlier this month. So until the company fails to deliver in any of the areas discussed above, investors need not worry even if its misses estimates next week.

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Neha Chamaria

Neha has been contributing to since 2011, including a one-year stint at the Foolish Blogging Network. She focuses on materials and industrials sectors, with special interest in fertilizers, chemicals, and heavy-equipment companies. Neha loves decoding 10Qs and 10Ks to dig out information about a company an investor would otherwise not know; and cracking the real reasons behind a stock’s move thrills her. Check back at for her articles, or follow her on Twitter

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