Cummins Rolls Over Wall Street

02/02/2012 4:03 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Recently, analysts were concerned about a global slowdown cutting into profits at companies like Cummins, but the engine builder pulled off a strong positive surprise today, writes MoneyShow’s Jim Jubak, who also writes for Jubak’s Picks.

So much for any worries about last quarter.

Today before the market opened in New York, Cummins (CMI) announced fourth-quarter earnings of $2.56 a share, excluding non-recurring items. (Cummins is a member of my Jubak’s Picks portfolio.)

That was a 55.4% increase from earnings of $1.84 in the fourth quarter of 2010. The earnings results also beat Wall Street estimates by 29 cents a share. (Much of this beat—18 cents—came from a favorable change in the company’s tax rate. But an 11 cents a share surprise isn’t shabby.)

Revenue climbed 19% from the fourth quarter of 2010 to $4.92 billion (versus the Wall Street projection of $4.73 billion.)

For 2012, the company guided analysts to expect revenue growth of 10% or better ($19.85 billion versus the consensus of $19.69 billion) and an EBIT margin (earnings before interest and taxes) of 14.5% to 15%. That works out to 2012 earnings of $9.80 to $10.20 a share, versus the Wall Street consensus of $9.81.

Not that every one of Cummins’ business units killed during the quarter. The construction market in China and the power-generation market in India showed weak demand. Global sales for the power-generation business climbed only 2% from the fourth quarter of 2010.

It’s just that the big units did kill. Sales in the engine segment were up 23% from the fourth quarter of 2010, and sales of engine components climbed 19%.

The big story in those two units was the increase in EBIT margin, though. In the engine segment, EBIT margin went to 12% of sales from 10.3% of sales in the fourth quarter of 2010. In the engine component segment, the margin increase was to 12.1% of sales, from 9%.

The company’s conference call was very reassuring to any investor worried that all this current success might go to the company’s head. (I do think about that.) Executives sounded like the truck engine geeks that I want looking after business.

The biggest excitement came when management talked about the reliability of the company’s new engines. Warranty costs in 2011 were the lowest Cummins has seen in 20 years, because of that reliability.

In comparison, management sounded almost reluctant to talk about US market share. Analysts pressed to find out how the positive reception of the new engines had increased market share.

It’s just too volatile month to month, the company said initially, before admitting to a 38% market share. That’s toward the high end of the mid- to high-30s range that the company suggested back in December.

With a gain of better than 7.5% today, the stock looks like it has decisively broken through the $100 a share level that stymied it repeatedly in November. However, I’ve had a very aggressive target price of $145 a share by July on these shares, and despite today’s numbers I don’t see any reason to increase that now.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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