Cummins: A Powerhouse DRIP

09/11/2017 2:52 am EST


Jimmy Mengel

Editor, Outsider Club

Cummins Inc. (CMI) has been in the portfolio since June 2015 and has been quietly chugging along as one of our DRIP positions, notes Jimmy Mengel, a dividend reinvestment specialist and editor of The Crow's Nest.

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The company isn’t one that most people have heard of. You basically have to either work with trucks, trains, generators, or large machinery to be exposed to it.

In that arena, it is a powerhouse. It designs, manufactures, distributes, and services diesel and natural gas engines, along with components for filtration, after-treatment, turbochargers, fuel systems, controls systems, air handling systems, and electric power generation systems.

Cummins earned $1.39 billion on sales of $17.5 billion in 2016. It also fully rebounded from share price losses in 2015 and has since gone on to outpace the S&P 500 by about 5% year to date in 2017.

This steady year-and-a-half march has been driven by relatively solid numbers, a rising tide in the broader market, and widespread expectation of increased infrastructure spending in North America, India, and China.

We saw some of that in the 1Q 2017 earnings report, with a 7% year-over-year revenue increase. International sales were up 17%, primarily from China and Europe.

However, in the second-quarter, CMI earned  $2.53, below the $2.58 per share analysts expected. It’s a stumble of sorts, but it’s nothing that can’t be easily recovered from. And Cummins has a great history of responsive management.

Q2 also saw North American revenue improve 13%, primarily due to higher levels of industry production and increased market share in on-highway markets. Cummins also saw growth in sales of engines and parts to customers in construction, oil, and also the gas and mining markets.

International revenue increased by 11% in the second quarter of 2017, compared with a year ago.  All told, Q2 China revenue—including joint ventures—went up 28%, with very strong demand in the medium- and heavy-duty trucks and construction markets.

All these are great signs. The company missed on the headline earnings-per-share figure, but you can see that it delivered quite a bit once you dig into the details.

Due to stronger demand from the truck and construction markets in North America and China, the company raised its full year outlook. It now expects revenue to climb 9%–11%, up from prior guidance of 4%–7%.

The second half will see more investment by the company in new technologies, including electrified powertrains. This is much bigger news for us and bodes well for our strategy of holding Cummins shares long term.

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