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Why Is Cummins (CMI) Up 8.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Cummins (CMI - Free Report) . Shares have added about 8.7% in that time frame, outperforming the S&P 500.

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

Cummins’ Q3 Earnings Top Estimates, 2018 View Intact

Cummins reported adjusted earnings of $4.05 per share in third-quarter 2018, beating the Zacks Consensus Estimate of $3.75. The company’s earnings per share were $2.71 in the year-ago quarter.

During the reported quarter, net income was $692 million compared with $453 million in the prior-year quarter.

Revenues improved 12% year over year to $5.94 billion in the reported quarter. The top line marginally missed the Zacks Consensus Estimate of $5.95 billion. The year-over-year rise was owing to increased demand for trucks, construction and power generation equipment across all markets.

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose $983 million (16.5% of sales) compared with $788 million (14.9% of sales) recorded in the prior-year quarter.

Segmental Performance

Sales at the Engine segment grew 17% to $2.7 billion on the back of an 18%increase in North America and 14% in international markets. The segment’s EBITDA increased to $405 million (14.9% of sales) from $276 million (11.8% of sales) a year ago.

Sales at the Distribution segment increased 10% to $1.9 billion. Revenues benefited from 12% rise in the North American segment and 6% growth in international markets. The segment’s EBITDA rose to $155 million (8% of sales) from $120 million (6.8% of sales) a year ago.

Sales at the Components segment surged 14% to $1.8 billion, owing to revenue growth of 25% in North America in addition with 2% increase in international sales. The segment’s EBITDA was $288 million (16.4% of sales) compared with the year-ago tally of $259 million (16.9% of sales).

Sales at the Power Generation segment improved 5% to $1.1 billion, banking on an increased demand in oil and gas, and power generation markets. The segment’s EBITDA rose to $163 million (14.7% of sales) in third-quarter 2018 from $111 million (10.5% of sales) in the year-ago quarter.

Sales at the Electrified Power segment were $2 million while the segment witnessed EBITDA loss of $30 million.

Financial Position

Cummins’ cash and cash equivalents were $1.2 billion as of Sep 30, 2018, from $1.4 billion as of Dec 31, 2017. Long-term debt totaled $1.56 billion as of Sep 30, 2018, marking a slight decline from $1.59 billion recorded on Dec 31, 2017.

At the end of the first nine months of 2018, Cummins’ net operating cash inflow was $1.4 billion compared with $1.5 billion in the same period of 2017. Capital expenditure was $361 million, marking a decline from $147 million in the same time frame.

Capital Deployment

During third-quarter 2018, Cummins returned $682 million to shareholders in forms of dividends and share buybacks. During the quarter under review, the company completed its previously announced share repurchase plan of $500 million.

Year to date, Cummins has returned $1.4 billion to shareholders in forms of dividends and share repurchase. The figure is in sync with the target to return 75% of the company’s operating cash flow to shareholders.

On Oct 9, 2018, Cummins’ board approved a new share repurchase plan worth $2 billion. Additionally, it announced a quarterly cash dividend of $1.14 per share, payable on Dec 3, 2018.

2018 Guidance

For 2018, Cummins reiterated its revenue growth expectation at 15-17%. Moreover, EBITDA is expected to be 14.8-15.2%, which is unchanged from the previous anticipation.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Cummins has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Cummins has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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