Why Cummins Stock Jumped 13.5% in June

It was a pretty good month, backed by a string of news reports that show the engine maker is successfully changing with the times.

Reuben Gregg Brewer
Reuben Gregg Brewer
Jul 4, 2019 at 9:25AM
Industrials

What happened

The shares of engine maker Cummins (NYSE:CMI) rose by 13.5% in June, according to data provided by S&P Global Market Intelligence, a little more than twice the increase in the S&P 500 Index. That continued a solid yearlong advance that left the stock 28% higher at the end of the second quarter. The broader market advanced about 17% over the same six-month span. Although there wasn't a specific reason for the solid first-half showing, Cummins has been benefiting from a string of good news -- with a few key updates released in late May and June.

So what

In February, Cummins reported that 2018 sales and EBITDA had both hit record levels, up 16% and 13% respectively. EBITDA was around 14.6% of sales. The 2019 outlook at the time was for sales growth of flat to 4%, with EBITDA at about 15.75% to 16.25% of sales. In other words, the company was looking at a year that was solid, though perhaps not spectacular. 

A candle stick chart with stock quotes in the background

Image source: Getty Images.

In late April the company reported first-quarter earnings. Sales increased 8% and EBITDA hit a record of $1 billion, making up 17.2% of sales, easily besting the earlier projections. Based on these results, Cummins updated its full-year guidance. Although its sales outlook remained the same, it projected that EBITDA would be between 16.25% to 16.75% of sales for all of 2019. Simply put, the business was performing better than originally expected. Investors had a clear reason to be positive about the company's direction. 

Then, in mid-May, it announced that it was expanding its presence in India, a key global growth market that could help drive long-term performance. Shortly after that news, bus builder Gillig and Cummins announced that Gillig's zero-emission electric bus was now available. Cummins' battery electric system is the core of the vehicle, and shows that the engine maker is making important inroads in the EV market as the world shifts toward electric power.

And in late June, it announced that it was buying fuel cell company Hydrogenics, once again showing that it realizes that it needs to branch out beyond carbon-fuel engines. 

Overall, there was not a specific issue that drove the company's performance in June. But with all the positives through the year and the news flow in May and June, it's easy to see why investors were viewing the stock positively last month.


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Now what

Cummins is a major player in the heavy vehicle market. There has been concern that its future is tied too closely to older technology -- largely diesel engines. But the core business is clearly doing just fine today, and the company is making the changes necessary to remain relevant as the transportation industry shifts to new technologies. Although the stock isn't exactly a screaming buy, investors may want to put it on their watch lists. A pullback in price that lifts the yield into the 4% range could make it a worthwhile addition for income investors.