Cummins (NYSE:CMI), the Columbus-based engine maker, is scheduled to report its second-quarter earnings on July 28. In the first quarter, Cummins turned in a strong operating performance with double-digit growth in revenue and profits (EBIT) accompanied with an impressive increases in margin. Will it fare just as well in the second quarter? Here's what to expect.

ISX15 for Heavy-Duty Truck (2013), Source: Cummins

Strength in North American truck market could drive revenue
Analysts expect Cummins to generate revenue of $4.82 billion in the quarter, up 7% from $4.52 posted in the year-ago period. The forecasted growth rate is at the conservative end of the company's own full-year guidance of 6%-10% revenue increase. Analysts' outlook gets more aggressive in the second half of the year. For the full year, the expectations are for 9.2% growth, in line with the higher end of the company's guidance. Cummins derives most of its top line from engine and component sales to industrial customers, notably truck makers.

Measured before inter-segment eliminations, Source: 2013 10K (link opens a PDF) 

And since the U.S. truck market is in an expansion mode, 2014 is being seen as a year of growth for Cummins. A recent study by ACT Research revealed that North America was producing 1,100 units trucks everyday in June compared with around 1,000 units last fall. The report predicts that annual production in 2014 could range between 290,000 and 290,500 units, up from the earlier prediction of mid-280,000 range.

Around 61% of engine sales and most of component sales come from trucks, with North America being the primary market. In North America (link opens a PDF), Cummins has a 61% market share in medium-duty trucks and 40% market share in heavy-duty trucks.

In the first quarter, engine sales were up 11% to $2.6 billion and component sales 21% to $1.2 billion, betting on which Cummins has upped its guidance for the two segments. So, we can look forward to some good numbers here.

Source: First-quarter conference call transcript

Cummins case is also helped by the fact that most of its key customers' are posting higher sales figures, and might even end the year on a great note. This will have a direct bearing on engine demand. In the first quarter, one of Cummins' biggest customers, Daimler AG, reported 29.5 billion euro ($40.17 billion) in revenue, a 13% year-over-year improvement. This translated into a 31% increase in Cummins' shipment volumes to Daimler during the quarter. Daimler has forecasted that its 2014 truck sales will be significantly higher than the year-ago levels. Paccar, another crucial Cummins customer, pulled off an 11.6% revenue increase, from $3.9 billion in the first quarter of 2013 to about $4.4 billion in the same period of 2014.

Freightliner M2 106 pickup and delivery truck; Source: Daimler

Distribution business could continue to grow, outlook for power business uncertain
Cummins is investing heavily in its distribution business, which is into sales and service of Cummins products. On one hand, the company is expanding its network to capture more of high-margin aftermarket business and on the other, it is pursuing a strategy of acquiring its North American dealers to enhance earnings. Cummins has a budget of $600 million for the entire acquisition initiative that will be funded through debt, and it expects the move to add $2.0 billion-$2.5 billion in 2015 and $3.0 billion-$3.5 billion in 2018. The acquisitions would be immediately accretive to earnings.

At the end of the first quarter, management had said that the acquisitions will add $400 million to the top line and $0.20 and $0.25 per share to the bottom line in 2014. The segment's double-digit revenue growth seen in the first quarter is likely to continue, driven by higher end-market demand in North America and the acquisitions.

The outlook for the power generation segment remains uncertain. First quarter sales were off 14% year over year and management has abstained from projecting an ambitious outlook. Sales are expected to range from negative 3% to positive 3% for the full year, so power sales could remain a cause for concern.

Earnings could grow
Cummins has increased its cost-cutting efforts in the past three years, and achieved big savings in logistics and warehousing. It's currently focusing on synchronizing its internal supply chain. In the first quarter, gross margin expanded to 25.3% from 24.4% in the year-ago quarter, driven by higher volume, lower warranty costs, and favorable material costs, which was partially offset by unfavorable foreign exchange impact. EBIT margin increased to 12%, up from 11.1% in the year-ago period. We can expect the margin momentum to continue and aid earnings per share.

Wall Street forecasts that Cummins' full year earnings to be $8.98 per share, up from $7.52 per share in 2013. In the second quarter, analysts are expecting earnings of $2.39 per share, a 9.5% improvement from last year's $2.20 a share.

Final take
Robust demand in the U.S. truck market could aid Cummins' performance in the second quarter. The company is implementing strategic initiatives like acquisition of U.S. dealerships and increasing exposure to profitable aftermarket services. These could cushion any weakness in the power markets. Analysts are optimistic about Cummins' second-quarter performance -- let's keep our fingers crossed.