Will Cummins Defy an Expected Earnings Slowdown?

Source: Cummins.

For years, engine-maker Cummins (CMI -1.32%) has taken advantage of an improving industrial economy with a particular emphasis toward innovative new engine designs that allow vehicles to go beyond traditional diesel-fuel power.

In particular, natural-gas engines have drawn a huge amount of interest ever since the energy boom began, as cheaper prices of the clean-burning fuel have been attractive to those seeking lower emissions and reduced operating expenses.

With the company announcing its first-quarter earnings on Tuesday morning, though, Cummins has some investors worried about whether the recent plunge in energy prices will stop this growth dead in its tracks. Let's look more closely at how Cummins has done in recent months and what investors should expect from its financial report.

Stats on Cummins

Source: Yahoo! Finance.

Can Cummins keep revving higher?
Nervousness about Cummins' earnings has definitely risen among investors in recent months, who have cut their views on first-quarter and full-year 2015 and 2016 earnings by about 7% to 9%. The stock has also responded badly to the news; shares have fallen about 5% since late January.

Cummins' fourth-quarter financial report prepared investors for what could be a slower 2015 for the engine-building company. Sales gains of 11% compared to the previous year's quarter showed the continued attractiveness of Cummins' engines, and earnings came in well above expectations. Yet many investors focused on the company's warning that it expects sales growth to slow to just 2% to 4% this year, and those slower-growth expectations are already baked into the consensus figures among those following the stock.

Yet those who favor the stock still see plenty of upside for the engine maker's future. In China, Cummins has had good success in growing despite an overall slowdown in the pace of growth in the world's second-largest economy. For China, natural-gas engines represent a path toward pollution reduction in key Chinese cities, where health concerns have run rampant for years. In the long run, they could also help reduce costs for Chinese transportation providers, as efforts to unearth shale-gas plays and ongoing projects to import liquefied natural gas from gas-rich areas like Australia could result in reducing high natural-gas prices in China and making nat-gas more cost-effective compared to petroleum-based fuels. 

With the emerging-market country finally starting to take greater steps toward reining in transportation businesses by imposing emissions standards, Cummins could easily see more business from Asia in the years to come.

Source: Cummins.

In addition, Cummins continues to innovate. Last month, it announced its EcoFit Single Module exhaust-aftertreatment product, which is designed to provide cleaner emissions while improving fuel economy and managing heat as efficiently as possible. By making such products easy for original equipment manufacturers to install in their vehicles, Cummins hopes to stay ahead of the curve in helping its customers meet standards by the EPA and its international counterparts worldwide.

At the same time, Cummins has also come out with electrical and hydraulic power generators designed to run on compressed natural gas, taking advantage of the greater use of CNG for commercial truck fleets to offer the power needs its food-service, telecom, and utility company customers have. Adding these capabilities will make it easier for more potential Cummins customers to shift to natural-gas-powered vehicles, further boosting Cummins' overall business footprint.

In the Cummins earnings report, it'll be important to see if the year starts out even slightly better than the dour projections the company gave last quarter. Already, shareholders have ratcheted down their expectations, so anything short of a worst-case scenario could actually produce a solid rise for the sagging stock. Moreover, with crude oil prices having apparently bottomed and shown signs of a rebound, Cummins' customers could recommit themselves to bearing the up-front costs of natural-gas conversion in exchange for expected benefits down the road.