Cyclical companies see plenty of ups and downs by their very nature, and after 10 years of economic expansion, U.S. investors are rightfully starting to wonder if a reversal of fortune lies dead ahead. For engine maker Cummins (NYSE:CMI), 2018 has been a great year for growth, but it's hard for a company that large to sustain strong momentum indefinitely.
Coming into Wednesday's fourth-quarter financial report, Cummins investors were looking to see solid gains in both sales and earnings, and the company didn't disappoint in that regard. Yet with an outlook for 2019 that suggests a big slowdown in the coming year, investors will have to come to grips with what that means for the engine manufacturer's long-term prospects.
Cummins keeps hitting the gas
Cummins' fourth-quarter results were consistent with what the company has achieved throughout 2018. Sales of $6.12 billion grew 12% from the fourth quarter of 2017, and the number was slightly better than the $6.09 billion that most of those following the stock were looking to see. Net income of $579 million reversed a year-earlier loss, but after excluding some one-time items, adjusted earnings of $3.48 per share fell well short of the $3.81-per-share consensus forecast among investors, despite being markedly higher than year-earlier levels.
As has been the case in recent quarters, Cummins did better domestically. In North America, sales climbed 17% for the quarter, compared to just 6% growth in Europe, Latin America, and the Asia-Pacific region. Cummins pointed to increased truck production in North America and better demand in the global construction and power generation markets as key drivers of gains in revenue, although adverse currency impacts cost Cummins about 2 percentage points of overall sales growth.
Cummins got the best performance from its engine segment, which saw an 18% rise in sales and a 45% boost to adjusted pre-tax operating earnings. The company pointed to strength in both on-highway and off-highway applications. The components business was also highly successful, with the segment top line rising 14% and helping to produce a 30% rise in bottom-line performance from the unit. Nearly all of those gains came in North America, while international sales climbed just 3% within the division.
Power systems saw a 9% rise in sales but flat performance in adjusted pre-tax operating earnings, and the distribution segment had the slowest sales growth at just 6% even as its pre-tax operating earnings were higher by 14% on an adjusted basis. Power generation was the biggest grower in the systems unit, and strong demand for power generation equipment managed to outpace weaker demand from energy customers.
CEO Tom Linebarger was happy with how Cummins has done. "Our financial strength allows us to continue investing and innovating across our broad portfolio of power solutions," Linebarger said, "to remain a global technology leader for the next 100 years while continuing to return significant capital to investors." The CEO praised his employees for making a record 2018 possible.
Sluggish times ahead?
Cummins didn't show any signs of dampening enthusiasm for the coming year. In Linebarger's words, "2019 is a historic year for Cummins as we celebrate the 100th anniversary of our company and project another record year of financial results."
Yet Cummins' projections for 2019 reflect considerably less optimism about its ability to sustain the pace of recent growth. The company believes that revenue for the full year will come in flat to up 4%. Cummins also sees pre-tax operating earnings of between 15.75% and 16.25% of sales, with expectations to return 75% of operating cash flow for the year to investors in the form of dividends and stock buybacks. The consensus forecast for 3% revenue growth in 2019 is consistent with that downbeat assessment, but it'll still look as though Cummins is seriously hitting the brakes with its top-line growth.
Cummins investors weren't entirely pleased with that assessment, and the stock dropped almost 2% in pre-market trading following the announcement. There are still opportunities for Cummins to grow, but it'll take somewhat more effort to push higher after the strong year that the engine maker saw in 2018.