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Cummins Keeps on Truckin' and Picks Up Market Share in a Weak Global Market
04/29/2015 5:18 pm EST
With a company like Cummins, the key is to pay attention that its formula is still working in down cycles, not the results in those cycles. However, the current weakness in the global economy is still leading MoneyShow's Jim Jubak to lower his target price as of April 29.
Yesterday, April 28, Cummins (CMI) announced a penny a share miss on first quarter earnings of $2.14 a share and a disappointing 6% increase in revenue to $4.71 billion that nonetheless beat analyst forecasts of $4.53 billion. For the year, Cummins said revenue would grow by just 2% to 4% to $19.6 billion to $20 billion versus a consensus estimate of $19.81 billion.
But with a company like Cummins-which has successfully navigated the ups and downs of the cyclical market for diesel engines-what you should pay attention to aren't the results in those down parts of the cycle. Instead, you should check to see that the company continues to follow the very simple formula that has driven its success up cycle and down cycle and to see that formula is still working.
In the case of Cummins, a simple rule for those times when the stock is lagging the market might be, "If it ain't broke, buy it." Cummins is currently cheap with a trailing 12-month price to earnings ratio of 15.4 and a forward PE of 13.62. I don't think the current weakness in the global economy that has slowed growth at Cummins is likely to end in 2015 so I'd certainly understand if you wanted to wait until you saw signs that the cycle was about to head up. (And it's the weakness in that global economy that leads me to reduce my target price for Cummins to $154 by December 2015 from the previous $181.) On the other hand, I've personally missed the turn of the cycle on Cummins more than once and the shares do pay a dividend of 2.2%. That's higher than the 2.05% yield (as of April 29) on 10-year US Treasuries so you do get paid something if you're early.
It's pretty clear what was wrong with revenue and earnings at Cummins this quarter, and according to company guidance, what will be wrong for the rest of 2015.
A strong US dollar whacked revenue and earnings. And weak global economic growth in general-and in Brazil and China in particular-offset solid growth in North America and a decent recovery in Europe.
But Cummins continued to execute. Here's what I saw in the quarter that was more important than the cyclical swing in revenue and earnings.
Cummins continued to pick up market share in key markets. The company already has a 72% share of the North American market for medium-duty truck engines and forecasts a 36% share of the North American market for heavy-duty truck engines in 2015. Internationally, Cummins saw its share of the diesel truck market grow to 12% from 10% in the quarter.
Gains in market share in China compensated for anemic growth in that market in general. For example, Cummins said it was on track to deliver more than 100,000 light-duty truck engines in China this year. That would be growth of 28% in a market that is projected as flat for the year.
A second part of the Cummins formula is to invest-even in a weak market-in technology and quality improvements that cut costs. Warranty costs are one measure of that effort since fewer engines sent back for repairs at company expense is a good measure of product quality. In its conference call, Cummins said that it expects warranty costs to fall in the second half of 2015 from the first half of this year and from the last half of 2014.
This attention to growing market share and cutting costs means that Cummins is a cash flow cow. The company has used that cash flow to grow dividends at a compounded annual growth rate of 34% over the last five years. (It has also bought back $1.5 billion in stock over the last three years.) With the payout ratio at just 34% of free cash flow, Cummins has plenty of room to keep the dividend growing. The company has a history of announcing dividend increases in May. In May 2014, Cummins raised its quarterly dividend to 78 cents a share from 62.5 cents.
The shares closed at $138.03, down 1.44%, on April 29.