Cummins Inc.’s (CMI) earnings per share increased 27.1% to $1.83 in the first quarter of 2014 from $1.44 (excluding special items) reported in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate of $1.71 per share. Net income came in at $338 million compared with $271 million in the first quarter of 2013.
Revenues in the quarter rose 12.3% year over year to $4.4 billion, mainly driven by rising demand in on-highway markets and distributor acquisitions in North America. Also, revenues steered past the Zacks Consensus Estimate of $4.2 billion.
Operating income increased about 23.9% to $513 million from $414 million a year ago. Earnings before interest and taxes (EBIT) improved 20.8% to $528 million or 12% of sales, compared with $437 million or 11.1% a year ago.
Segment Performance
Sales in the Engine segment rose 11% to $2.6 billion on increased demand in on-highway markets in North America, partially offset by weakness in global mining and power generation markets. The segment’s EBIT increased to $269 million or 10.5% of sales, compared with $195 million or 8.5% a year ago.
Sales in the Components segment grew 21% to $1.2 billion on the back of strong on-highway demand in Europe, China and North America, mitigated by weaker demand in Brazil. This segment’s EBIT surged to $167 million, or 13.6% of sales, versus $119 million or 11.7% in the prior-year quarter.
Sales in the Power Generation segment went down 14% to $639 million due to poor revenues in India, North America and Asia Pacific. The segment’s EBIT fell to $25 million, or 3.9% of sales, compared with $51 million or 6.8% in the first quarter of 2013.
Sales in the Distribution segment rose 22% to $950 million on the back of benefits from acquisitions and higher demand for parts and services in the North America and Asia Pacific. The segment’s EBIT decreased to $76 million, or 8% of sales, versus $95 million or 12.2% a year ago.
Financial Position
Cummins’ cash and cash equivalents increased to $2.2 billion as of Mar 31, 2014 from $2.7 billion at the end of 2013. Debt decreased to $1.67 billion as of Mar 31, 2014 from $1.72 billion as of Dec 31, 2013. Consequently, the debt to capitalization ratio stood at 18.5% as of Mar 31, 2014 compared with 18.7% as of Dec 31, 2013.
In the first three months of 2014, Cummins’ net operating cash flow was $263 million compared to $428 billion in the same period a year ago. Capital expenditures declined to $107 million from $114 million in the previous year.
2014 Guidance
For 2014, Cummins increased the revenue guidance to 6% to 10% from the previous estimate of 4% to 8%. The hike in demand was driven by higher demand in North America. The company also expects its 2014 EBIT margin to be in the 12.75–13.25% range.
Our Take
Cummins expects that launch of new products to enhance profitability. The company repurchased 3 million shares in the first quarter of 2014 and has committed to return 50% of its full-year operating cash flow to shareholders through dividends and share repurchases.
However, we are concerned about weak market conditions in India and Australia, which will lead to lower demand for power generation and mining equipment. Currently, CMI retains a Zacks Rank #2 (Buy).
Cummins Inc. is a leading worldwide designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.
Other stocks that are performing well in the broader industry include Meritor, Inc. (MTOR), Superior Industries International, Inc. (SUP) and Magna International Inc. (MGA). All three companies carry a Zacks Rank #1 (Strong Buy).
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