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Cummins (CMI) Q2 Earnings Lag Estimates, Guidance Improve

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Cummins Inc. (CMI - Free Report) reported earnings of $2.53 per share in the second quarter of 2017, up from $2.40 earned in the year-ago quarter. Also, the bottom line missed the Zacks Consensus Estimate of $2.58.

Net income rose to $424 million from $406 million in the second quarter of 2016. Earnings were lower-than-expected due to higher warranty costs, which were again partly offset by a good operational performance.

Revenues improved 12% year over year to $5.08 billion in the reported quarter. This figure also outpaced the Zacks Consensus Estimate of $4.79 billion. The year-over-year rise was owing to an increased demand of trucks and construction equipment in North America and China, plus  stronger sales to mining and oil & gas customers.

Operating income increased to $595 million from $567 million a year ago. Earnings before interest and taxes (EBIT) was $620 million (12.2% of sales) compared with $591 million (13.1% of sales) a year ago.

Cummins Inc. Price, Consensus and EPS Surprise

Segment Performance

Sales at the Engine segment rallied 15% to $2.3 billion on the back of a 14% increase in on-highway revenues and 20% in off-highway revenues, resulting from an escalated demand in global truck and construction market. The segment’s EBIT increased to $277 million (12% of sales) from $206 million (10.3% of sales) a year ago.

Sales at the Components segment improved 14% to $1.5 billion owing to revenue growth of 25% in China and India in addition to 6% increase in North America. The segment’s EBIT of $190 million (13.1% of sales) was on par with the year-ago figure.

Sales at the Power Generation segment increased 10% to $1 billion, banking on high revenue growth in mining and oil & gas markets. The segment’s EBIT declined to $61 million (6% of sales) in second-quarter 2017 from $90 million (9.8% of sales) in second-quarter 2016.

Sales at the Distribution segment shot up 12% to $1.7 billion. Revenues benefited from the company’s acquisitions, were partly offset by the negative impact of foreign currency. The segment’s EBIT increased to $96 million (5.6% of sales) from $87 million (5.6% of sales) a year ago.

Financial Position

Cummins’ cash and cash equivalents increased to $1.3 billion as of Jul 2, 2017 from $1.1 billion as of Dec 31, 2016. Long-term debt totaled $1.6 billion as of Jul 2, 2017, a marginal decrease in comparison to the Dec 31, 2016 level.

In the first six months of fiscal 2017, Cummins’ net operating cash inflow increased to $826 million from $738 million in the same period a year ago. Capital expenditures declined to $182 million from $189 million in the same time frame.

Capital Deployment

Till the end of second quarter, Cummins has returned $463 million to shareholders in the form of dividends and share buybacks. The company is focused on enhancing the shareholder value by pursuing aggressive share repurchases and increasing the dividend payouts. Recently, it raised the cash dividend payment 5.4%, from the year-ago period.

2017 Guidance

For 2017, Cummins anticipates revenues to grow 9-11% compared with the prior guidance of 4-6% rise in revenues. EBIT is expected in the range of 11.75–12.5%, unchanged from the previous guidance. These expectations exclude the impact of the joint venture between Cummins and Eaton. Launched in Apr 2017, the collaboration is known as Eaton Cummins Automated Transmission Technologies.

Price Performance

Cummins shares have climbed 14.7% in the last six months, substantially outperforming the 3.3% increase of the industry it belongs to.

Zacks Rank & Other Key Picks

Cummins currently carries a Zacks Rank #2 (Buy).

Some other top-ranked companies in the auto space are Allison Transmission Holdings (ALSN - Free Report) , Volkswagen AG (VLKAY - Free Report) and Daimler AG (DDAIF - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission has expected long-term growth rate of 11%.

Volkswagen has expected growth rate of around 17.3% over the long term.

Daimler has expected long-term growth rate of 2.8%.

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