Cummins Inc.’s (CMI) earnings per share increased 10.5% to $2.43 in the second quarter of 2014 from $2.20 in the year-ago quarter. Earnings also surpassed the Zacks Consensus Estimate of $2.39 per share. Net income came in at $446 million compared with $414 million in the second quarter of 2013.
Revenues in the quarter rose 6.9% year over year to $4.8 billion, mainly driven by rising demand in on-highway markets and distributor acquisitions in North America. However, revenues missed the Zacks Consensus Estimate of $4.9 billion. The company is benefiting from an improving economy and increased market share in medium duty truck and bus markets.
Revenues from North America, improved 14% year over year in the second quarter of 2014. However, revenues from international markets declined 1% year over year due to lower revenues in Mexico, Brazil and India, partially offset by better performance in China.
Operating income increased to $612 million from $610 million a year ago. Earnings before interest and taxes (EBIT) improved 5.8% to $657 million or 13.6% of sales, compared with $621 million or 13.7% a year ago.
Segment Performance
Sales in the Engine segment rose 3% to $2.7 billion on increased demand in on-highway markets in North America, partially offset by weakness in global power generation and the Brazilian truck market. The segment’s EBIT decreased to $311 million or 11.3% of sales, compared with $339 million or 12.8% a year ago.
Sales in the Components segment grew 15% to $1.3 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 $185 million, or 14.5% of sales, versus $136 million or 12.2% in the prior-year quarter.
Sales in the Power Generation segment went down 9% to $743 million due to poor revenues in Middle East, North America and Asia Pacific, partially mitigated by higher demand in China and Africa. The segment’s EBIT fell to $61 million, or 8.2% of sales, compared with $76 million or 9.3% in the second quarter of 2013.
Sales in the Distribution segment rose 30% to $1.2 billion on the back of benefits from acquisitions and higher demand in North America and Africa. The segment’s EBIT improved to $126 million, or 10.2% of sales, versus $100 million or 10.5% a year ago.
Financial Position
Cummins’ cash and cash equivalents decreased to $2.2 billion as of Jun 29, 2014 from $2.7 billion at the end of 2013. Debt decreased to $1.66 billion as of Jun 29, 2014 from $1.72 billion as of Dec 31, 2013. Consequently, the debt to capitalization ratio stood at 17.6% as of Jun 29, 2014 compared with 18.7% as of Dec 31, 2013.
In the first half of 2014, Cummins’ net operating cash flow decreased to $701 million from $960 billion in the same period a year ago. Capital expenditures declined to $245 million from $275 million in the previous year.
2014 Guidance
For 2014, Cummins increased the revenue guidance to the range of 8–11% from the previous projection of 6–10%. The upside was driven by higher demand in North America. The company also expects its 2014 EBIT margin in the 12.75–13.25% range.
Our Take
Cummins is focused on enhancing shareholders value by pursuing aggressive share repurchases and increasing dividend payouts. The company has committed to return 50% of its full-year operating cash flow to shareholders through dividends and share repurchases. Recently, Cummins’ board authorized a share repurchase of up to $1 billion after the completion of the current $1 billion program. Cummins also announced a 25% increase in dividend to 78 cents. The dividend will be paid on Sep 2, 2014 to shareholders of record as of Aug 22, 2014.
Currently, Cummins carries a Zacks Rank #2 (Buy).
Some other well-performing automobile stocks worth considering include Tower International, Inc. (TOWR), Visteon Corporation (VC) and Magna International Inc. (MGA). All the stocks sport a Zacks Rank #1 (Strong Buy).
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