Cummins Inc. (CMI) is scheduled to release its second quarter 2011 results before the market opens on July 26, 2011. Columbus, Indiana-based Cummins earned a profit of $1.75 per share in the previous quarter, which was higher than the Zacks Consensus Estimate of $1.44 per share.
For the upcoming quarter, the Zacks Consensus Estimate for Cummins is pegged at a profit of $2.01 per share, which reflects an annualized improvement of 61%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is just 0.50%.
With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. The average earnings surprise is 16.15%, with negative surprise being recorded in only one of the four concerned quarters.
First Quarter Recap
Revenues for the company amounted to $3.86 billion in the first quarter, up 56% from $2.48 billion in the year-ago quarter mainly driven by the recovery in the North American truck market, productivity enhancements and increased activities in the international markets. Revenues also surpassed the Zacks Consensus Estimate of $3.60 billion.
The Engine segment contributed $2.39 billion to sales, up 68% from $1.42 billion a year ago. Total on-highway sales increased 86% year over year due to strong demand in Brazil and other emerging economies.
Sales from Power Generation were $795 million, up 54% from $517 million in the prior-year period. The upside in sales in this segment was driven by 67% rise in commercial projects sales, 64% increase in commercial products sales and 43% surge in generator technologies sales.
Sales from Component division were $924 million, up 47% year over year from $630 million reported a year ago. Improvements were also witnessed in Emission Solutions sales (up 99%), Fuel Systems sales (up 52%), Turbo Technologies sales (up 49%) and Filtration sales (up 12%).
Distribution sales amounted to $642 million, up 35% from $476 million during the prior-year quarter driven by improved sales across all the major markets including Europe, North and Central America and Asia Pacific.
Cummins had cash and cash equivalents of $779 million as of March 27, 2011 compared with $1.02 billion as of December 31, 2010. Besides, long-term debt as of the above date was $685 million versus $709 million at the end of the fourth quarter in 2010.
During the quarter, Cummins repurchased shares worth $190 million. Alongside, the company introduced a new share repurchase program in February that authorizes buyback of up to $1 billion worth of stock.
Estimate Revisions Trend
Earnings estimate for the second quarter of fiscal 2011 is currently pegged at a profit of $2.01 per share. The analysts are confident of the company’s various initiatives and strong business position, coupled with the recent trends in the industry.
Agreement of Estimate Revisions
Out of the 15 analysts covering the stock for the second quarter of fiscal 2011, two analysts have upgraded the stock in the past 30 days. However, none downgraded the stock during the same period.
Magnitude of Estimate Revisions
Following the first quarter earnings release in April, the second quarter earnings per share were projected at a profit of $1.78. However, in the last 60 days, the estimate increased to a profit of $1.95 per share. The estimate again rose by a penny to $1.96 in the last 30 days. In the past 7 days, the estimate was again revised upward to $2.00 per share. Currently, the estimate is $2.01 per share.
Our Take
Cummins is positioned to benefit from several trends, such as new emission standards, fuel economy improvement (i.e., light-duty diesel penetration) and favorable trends for its Power Generation business (i.e., increased demand for electricity against either aging or insufficient grid capacity).
New emission regulations provide lucrative opportunities for the company, including price rise ($3,000 higher than the cost of implementing the new regulations), market share gains (as some competitors cannot implement the new regulations) and increased engine content.
In addition, to consolidate its position in the engine division, the company invested heavily in capacity expansion and introduced new products. The company has plans for 22 major facility additions or upgrades and is also expanding its global distribution network.
Moreover, the company pursues an aggressive share repurchases policy. In 2010, the company repurchased shares worth $241 million. In February 2011, the company’s Board of Directors authorized the repurchase of up to $1 billion of common stock upon the completion of the $500 million program approved earlier in 2007. In the first quarter of 2011, the company repurchased shares worth $190 million.
Thus, keeping these in mind, the shares of Cummins Inc. are maintaining a Zacks #1 Rank, which translates into a short-term “Strong Buy” rating. Alongside, the shares also have an Outperform recommendation for the long term.
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