Diesel engine maker Cummins Inc.’s sales have shifted into a higher gear following six consecutive quarters with revenue declines over year-ago financial periods.
The Columbus-based Fortune 200 company reported Tuesday first-quarter revenues of nearly $4.6 billion, a 6.9 percent increase from the nearly $4.3 billion in revenue it reported for the same period in 2016. The company last reported a year-over-year quarterly revenue increase during the second period of 2015.
Sales during the first quarter increased in all four of the company’s business segments — Engine, Distribution, Components and Power Systems.
Cummins’ first-quarter results and the factors for the gains prompted the company to adjust its full-year forecast to the positive side. The company said it expects full-year revenues to be up 4 to 7 percent, compared to its prior projection of revenues flat to down 5 percent.
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“We’re off to a solid start,” Cummins Chairman and CEO Tom Linebarger told analysts during a conference call Tuesday to discuss the first-quarter results.
The stock market and analysts reacted positively to the company’s financial news.
Cummins’ stock closed at $160.56 Tuesday, a 6.1 percent increase from its Monday close of $151.33. The stock peaked at $163.36 per share shortly after Tuesday morning’s opening on the New York Stock Exchange — the high point for Cummins stock over the past 12 months.
Trading volume of Cummins stock was brisk, with 4.15 million shares changing hands Tuesday compared to an average daily volume of 1.23 million shares.
“All they needed was for the global economy to turn around, and I think it’s what we’re seeing and I think what we’ll continue to see,” said Craig Kessler, chief investment officer of Columbus-based Kessler Investment Group.
International sales improved by 17 percent, primarily due to growth in China and Europe, while revenues in North America increased 1 percent. Also, greater demand from construction and mining customers, and higher sales from a distributor acquisition in the fourth quarter of 2016 fueled the gains and offset the impact of weaker truck production in North America, the company said in a news release.
First-quarter net income of $396 million ($2.36 per diluted share) represented an increase from $321 million ($1.87 per diluted share) this time last year. Cummins’ stock price increase reflected Wall Street’s happiness because it had expected Cummins to report net income of $1.79 per diluted share — a 32 percent difference, said Scott DeDomenic, senior vice president and analyst with Hilliard Lyons’ office in Columbus.
Earnings before interest and taxes (EBIT) increased to $566 million from $484 million a year ago.
The company hinted at better earnings in February when it released its 2016 fourth-quarter and year-end results. Linebarger said then that for the first time in several years the company had started to see signs of improvement in markets that have been challenging.
“Cummins delivered solid financial results, successfully launched new products and returned $222 million in cash to shareholders in the form of dividends and share repurchases in the first quarter. We launched our fully updated range of engines for North American truck and bus markets, offering improved performance and better fuel economy for our customers,” Linebarger said Tuesday.
Cummins’ chairman also said that its recently announced joint venture with global power management company Eaton, to form the Eaton Cummins Automated Transmission Technologies, will further benefit the company as it strives to be the leading global powertrain supplier.
Eaton brings transmission expertise, while Cummins offers engine and components expertise. The joint venture will design, assemble, sell and support automated transmissions for heavy-duty and medium-duty commercial vehicles, which will be fully integrated with Cummins’ engine development to deliver up to an additional 7 percent improvement in fuel economy, Linebarger said.
“The joint venture will benefit from the continuing shift away from fully manual transmissions in commercial vehicles, launch new products that will gain market share, leverage Cummins’ strong presence in international markets for growth and generate aftermarket sales,” Linebarger said.
The revised full-year forecast does not include the impact of the new joint venture with Eaton, which will not be operational until third quarter, Cummins said in the news release.
Cummins reported that its four business segments experienced modest to double-digit sales increases for various reasons:
- Engine: About $2 billion, a 2.4 percent increase. Higher engine sales to global construction markets fueled a 20-percent increase in off-highway revenues, while on-highway revenues dropped 2 percent.
- Distribution: More than $1.6 billion, a 12.4 percent increase. Organic sales increased 6 percent, and the fourth-quarter 2016 purchase of a distributor added 6 percent in revenue.
- Components: More than $1.3 billion, an 8.6 percent increase. Strong international revenue growth, primarily in China, offset sales declines in North America caused by lower commercial truck production.
- Power Systems: $882 million, a 9.2 percent increase. Greater demand for industrial engines, primarily in the mining and the oil and gas markets, drove revenue growth.
Analysts react
The good first quarter was the result of Cummins managing expenses well, doing what is proper to keep the company on track and biding its time until the international markets turned around, Kessler said.
“They have been a coiled spring just waiting for international to pick up,” he said.
Cummins’ stock price increase reflects enthusiasm for what the company has been doing, Kessler said.
The company beat Wall Street’s expectations by a surprising margin because off-highway sales were greater than expected, DeDomenic said.
Engine sales for the off-highway market increased to $436 million from $363 million in first quarter of 2016, more than offsetting slight sales declines for heavy-, medium- and light-duty engines from January through March last year.
“What happened was off-road made a big difference — a huge difference — and nobody saw that coming,” DeDomenic said.
That’s a good example of why Cummins’ decision years ago to diversify its products and markets was a sound decision, he said.
Orders for companies similar to Cummins had been trending up, so some good news was expected, but not to the extent the first-quarter results showed, said Mark Foster, chief investment officer for Columbus-based Kirr, Marbach & Co.
Although Cummins didn’t factor its joint venture with Eaton into its full-year forecast, Foster said it should be a positive going forward. Kessler and DeDomenic agreed that it was a strategic move.
The goal is to make the transmission work hand-in-hand with the engine, and improve fuel efficiency and reliability, DeDomenic said.
“They’re trying to make a more attractive package to customers,” he said.
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Tuesday’s close: $160.56
Monday’s close: $151.33
Change: $9.23 (6.1 percent)
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“Cummins delivered solid financial results, successfully launched new products and returned $222 million in cash to shareholders in the form of dividends and share repurchases in the first quarter.”
— Cummins Chairman and CEO Tom Linebarger
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Cummins Inc.’s annual shareholders meeting is 11 a.m. Tuesday at Columbus Engine Plant, 500 Central Ave.
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