Investors, start your engines! Now insert your earplugs, just in case. Diesel-engine maker Cummins (NYSE:CMI) reports its Q1 2006 earnings numbers tomorrow, and if Cummins proves Wall Street wrong, the applause could be deafening.
What analysts say:
- Buy, sell, or waffle? I don't want to overstate the case here, but Wall Street hates Cummins. Really and truly hates it. Nine analysts follow the company, but only one of them rates it a buy. The rest of the votes break down as three holds and five sells.
- Revenues. Just like last quarter, there remains a real disconnect between the analysts' ratings and their expectations for tomorrow's news. At last report, they expected Cummins to report 12% better quarterly sales, for a total $2.5 billion.
- Earnings. Likewise with profits. The analysts believe that Cummins beat last year's numbers by 34%, and will report $2.62 per share tomorrow.
What management says:
In the firm's year-end review, CEO Tim Solso summed up 2005 as follows: "Our results for both the fourth quarter and all of 2005 are outstanding. This performance is evidence that we are transforming Cummins into a less cyclical, more diversified company while converting a larger percentage of sales into profit."
What management does:
Indeed, the numbers tell a similar tale (though only time will tell whether Cummins has killed the cyclical dragon). Over the last 18 months, the company grew its rolling gross margins by 220 basis points. Better still, it achieved this growth in the middle of one of the worst environments for manufacturers in recent memory, as the costs of everything from energy to steel skyrocketed. By holding operating costs to just a 14% rise against an 18% increase in sales between 2004 and 2005, the firm managed to widen operating margins even further. And the main reason that net margins "only" widened by 200 basis points, it seems, is because Cummins' tax burden increased.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
19.8 |
19.9 |
20.3 |
20.8 |
21.4 |
22 |
|
Op. |
5.9 |
6.5 |
7.1 |
7.6 |
8.3 |
9.1 |
|
Net |
3.5 |
4.1 |
4.7 |
5.1 |
5.3 |
5.5 |
One Fool says:
Last quarter, when previewing the superb news described above, I mentioned that the main concerns I saw at Cummins lay on its balance sheet, where growth in inventories was outpacing sales growth. Those concerns remain. Over the past six months, Cummins grew its sales 15%, but inventories rose 17% (and accounts receivable grew 24%).
If you're looking for something to hate about Cummins tomorrow -- or conversely, looking for signs that the company is improving one of the few things remaining to be improved -- these are the lines I'd focus on.
Competitors:
- Caterpillar (NYSE:CAT)
- CLARCOR (NYSE:CLC)
- DaimlerChrysler (NYSE:DCX)
- Donaldson (NYSE:DCI)
- Emerson Electric (NYSE:EMR)
- Honeywell (NYSE:HON)
Fool contributor Rich Smith does not own shares of any company named above.
