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Demand fuels Cummins sales rise

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Strong growth in North American revenues at Cummins Inc. fueled solid first-quarter earnings, the company reported Tuesday.

The Columbus-based engine maker reported first-quarter revenue of $4.4 billion, an increase of 12 percent from the same period a year ago.

Cummins Chairman and CEO Tom Linebarger said it was encouraging that the strong rebound in the North American market drove the increase.

“We delivered good incremental margins in the first quarter as demand in on-highway markets in North America improved,” Linebarger said. “We are also well on track to deliver the expected benefits from our North American distributor acquisitions as we execute our plans and end-market demand improves.”

Based on its first-quarter results, especially the resurgence of North American sales, Cummins projected that full-year revenues will increase 6 to 10 percent over last year, which is up from the previous forecast of a sales gain of 4 to 8 percent.

Linebarger emphasized the company’s commitment to continue developing new products that will drive future growth and to maintain efforts to reward investor confidence.

“We repurchased 3 million shares in the first quarter, consistent with our commitment to return 50 percent of full-year operating cash flow to shareholders through a combination of dividends and share repurchase,” Linebarger said.

Earnings before interest and taxes (EBIT) were $528 million for the first quarter, or 12 percent of sales, compared with $437 million, or 11.1 percent of sales, a year ago.

Investors applauded the news as they sent Cummins stock up $5.61, or 3.86 percent, to close Tuesday at $150.81.

Business trends

Revenue gains in China and Europe were offset by declines in other international markets, including India and Australia, which remain weak due to lower demand for power generation and mining equipment.

Scott DeDomenic, a senior vice president and analyst with Columbus-based Hilliard Lyons, said the strength of North American revenues, particularly in the component division, is encouraging.

“Cummins made a decision several years ago to buy out all of their parts distributors and their distribution network,” DeDomenic said. “The growth that they are seeing there validates the belief that they need to expand that business.”

Mark Foster, chief investment officer for the Columbus-based Kirr, Marbach & Co., said the industry reports prior to the first quarter suggested Cummins was in a good position.

“Those numbers were coming in better than people had anticipated,” Foster said. “As long as the rest of the world didn’t fall apart, it appeared that the first quarter would be a decent one, and that has been the case. The international market has really been the driver for this business over the last several years, but Cummins has good balance, and North America is coming back, and that is moving them in the right direction.”

Craig Kessler, chief investment officer for Kessler Investment group in Columbus, said the weaker international numbers were anticipated and the positive results from China are encouraging, considering the overall economic slowdown there.

“I think that bodes well for the company in that space going forward,” Kessler said. “Some of the emerging markets are seeing weakness right now anyway, so it wasn’t really surprising to see a poor number out of India. Cummins was really well positioned to take advantage of the industrial renaissance that has taken shape here in the United States and that bodes well for Cummins and for Columbus.”

Analysts agreed that Cummins also has an excellent handle on cost controls for a company of its size.

“They have a sharp pencil, and they use it well,” Kessler said.

The ability of the resurgence in the North American market to offset the downturn internationally was viewed as a sign that the company’s global strategy is working, and the emphasis on rewarding investors was also well-received.

“Once the international markets come back, we could see some pretty good margin expansion for this company,” Foster said. “If you work through it, the numbers calculate close to $1 billion in dividend and share buyback. That’s a good number from an investor standpoint.”

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