As a key manufacturer of engines for transportation companies worldwide, Cummins (NYSE:CMI) is subject to the macroeconomic trends that define the health of the global economy. Coming into Tuesday morning's first-quarter financial report, Cummins investors had been somewhat nervous about the company's impending slowdown in growth, which executives had warned would bring increases in sales down from 2014's pace. The company's latest results gave those investors some enthusiasm about the engine maker's prospects, although Cummins still believes the quarter's solid results won't by themselves prevent a major reduction in its revenue growth rate for the rest of the year. Let's look more closely at what Cummins said in its latest report and what it means for long-term shareholders going forward.
Cummins faces different market conditions
Cummins gave investors mixed news in its first-quarter results. Revenue climbed almost 7% to $4.71 billion, dramatically exceeding the $4.54 billion that most of those following the stock had anticipated. Earnings per share of $2.14 exactly matched the consensus figure, as net income climbed 14% to $387 million. Yet those figures included a tax benefit of $18 million, which added a dime per share to earnings.
Looking at its major segments, Cummins' performance was mixed but largely positive. The engine segment's growth was sluggish at just 1%, with operating income for the segment falling 6% as margins dropped by nearly a full percentage point. Cummins said strong on-highway markets in North America and rising demand in the power generation industry helped push sales higher, but weak levels of activity in the construction, mining, and marine markets held back the segment. Meanwhile, Cummins' components business's operating profit jumped 17% on a 6% rise in sales, and the power generation segment's operating income nearly doubled on strength in Asia, Africa, and the Middle East. In the distribution segment, sales jumped 55%, but when you take out the impact of the acquisition of its North American distributor network, organic sales fell 2%.
Once again, though, Cummins saw geographical pockets of strength and weakness. Sales in North America jumped 17%, but internationally, revenue fell 6%. Cummins pointed specifically to weakness in Brazil and Europe as holding back the company's overall growth, even as conditions in China have improved somewhat from recent quarters.
CEO Tom Linebarger pointed out the strengths in Cummins' overall business. "Record profitability in our Components Segment, execution of our distributor acquisition strategy, and the successful launch of new products in China and improved results in our Power Generation Business all contributed to earnings growth," Linebarger said in a press release, adding he believes that those accomplishments were essential in overcoming weak demand in several parts of the world.
Can Cummins keep sales climbing?
Given the strong sales, Cummins investors might have hoped for an increase in guidance for the rest of the year. Yet despite posting higher first-quarter revenue than expected, Cummins merely repeated its prior forecast for 2% to 4% growth in sales for 2015. Shareholders hope an expansion in pre-tax operating margin to 13.5%-14% will drive enough earnings growth to move the stock price higher.
One interesting piece of news came from the ailing energy industry, as Halliburton selected the engine maker to supply engines for its latest fracking spread of pumpers, blenders, and related support units for use in hydraulic fracturing operations. The equipment is the first to comply with the Environmental Protection Agency's Tier 4F emissions standards for off-road high-output engines, and Cummins said the engines will cut particulates by 93% and other emissions by more than half. As pollution control becomes more of a concern throughout the industries that Cummins serves, the company stands to improve its competitive position with its ability to innovate.
Cummins has also taken advantage of relative weakness in its share price to make large repurchases of stock. The company bought back another 1 million shares during the quarter, and share counts have fallen by about 2% over the past year, helping to add to Cummins' per-share results.
With the mixed results, Cummins stock whipsawed upward and downward in pre-market trading in the first hour following the announcement. Still, despite not updating its guidance, Cummins could deliver further positive surprises in revenue if the global economic picture improves, and the engine maker stands to benefit from U.S. strength even if the remainder of the world's economy keeps sputtering forward.