As companies like Caterpillar
Sales for the second quarter climbed 17% as strong sales in engines once again led the way. Revenue from the engine group rose 21% in the quarter, well ahead of the 7% growth of the power generation business and the mid- and high-teen growth of components and distribution.
Margins were once again quite solid. Gross margin improved by 2% and achieved a multiyear high for the company. Operating margin rose by a like amount, and operating income climbed more than 60%. On the bottom line, net income rose 72% for Cummins, and the company substantially raised its guidance.
Sharp-eyed Fools will notice that Cummins' cash flow isn't quite keeping up with net income growth. In fact, year-to-date operating cash flow is actually about 40% lower despite a doubling of income. I'm not particularly distressed about this yet, though the culprits are higher receivables and lower accounts-payable growth. I really doubt that the company is stuffing the channel, and this appears to be the sort of intra-year "noise" that can confound cash flow analysis on a quarter-to-quarter basis.
Interestingly, Cummins is doing great without a strong contribution from light-duty vehicles and RVs. While shipments of engines for the Dodge Ram truck have dropped off, that should improve in the back half of the year with the new 2006 model launch. In the meantime, robust heavier-duty markets such as mining and marine are more than making up for the lower year-over-year contribution of light-duty engines.
Of course, sooner or later this boom time in heavy trucks and equipment will end. When that happens (and I think it's when, not if), suppliers such as Cummins will see sales and profits fall. That doesn't mean that Cummins is a bad company or a bad stock. Not at all. It means that investors need to be cautious about projecting future earnings growth from today's somewhat lofty perch.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).