Investors, start your engines! Got 'em started? Good. Now let them idle for a while -- you've still got three days before the release of the Q4 and full-year 2005 earnings results from diesel engine maker Cummins (NYSE:CMI).

Wall Street Wisdom:

  • General consensus. Eleven analysts track the progress of Cummins, and by and large, they're not impressed, splitting their votes pretty evenly between "hold" and "sell."
  • Revenues. Which creates a bit of a disconnect between their ratings and their expectations for tomorrow's news. At last report, the consensus was that Cummins will report Q4 2005 sales that are 12% better than the $2.35 billion it made a year ago.
  • Earnings. Likewise with profits. The analysts believe that in the fourth quarter of 2005, Cummins earned a whopping $3.11 per share. If correct, that would be up 29% year over year, and a penny over the top of the $3.00 to $3.10 forecast from three months ago.

Margin watch:
The margin story looks just as good. Despite skyrocketing raw materials and energy costs -- inputs essential to create the outputs that Cummins sells -- the company has improved gross margins slightly in recent quarters. It has also boosted its rolling operating margins by better than 50% over the past 18 months, and more than doubled its net margins. What's not to like here?

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

19.3

19.8

20.0

20.3

20.8

21.4

Op.

5.1

5.9

6.4

7.1

7.6

8.3

Net

2.5

3.5

4.1

4.7

5.1

5.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Where's Waldo watch:
After searching actively for a downside to Cummins, I've found a couple possibilities. First, year-over-year sales growth has been slowing. The 12% posited for Monday matches last quarter's 12% growth, but falls short of the 17% growth noted in Q2 2005 and the 25% from Q1 2005. Meanwhile, in the most recent quarter, for example, we saw inventories rise 20% and accounts receivable rise 28% -- a deterioration over the 17% inventory rise and 24% A/R increase we saw in Q2.

Foolish lookout:
Need I even say it? What we'll be looking for on Monday is for Cummins to get its balance sheet looking half as good as its income statement.

Fool contributor Rich Smith does not own shares of any company naed above.