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Why Is Cummins (CMI) Up 3.4% Since the Last Earnings Report?

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It has been more than a month since the last earnings report for Cummins Inc. (CMI - Free Report) . Shares have added about 3.4% in that time frame, outperforming the market.

Will the recent trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cummins Q2 Earnings Lag Estimates, Guidance Improve

Cummins 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.

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.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been nine moves up in the last two months. In the past month, the consensus estimate has shifted by 12.3% due to these changes.

Cummins Inc. Price and Consensus

 

Cummins Inc. Price and Consensus | Cummins Inc. Quote

VGM Scores

At this time, Cummins' stock has an average Growth Score of C, however its Momentum is doing a bit better with an A. The stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for momentum investors while also being suitable for those looking for value and to a lesser degree growth.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy).




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