Cummins Beats, EPS Up 36%

Zacks

Cummins Inc. (CMI) reported a 33% rise in profits to $455 million in the first quarter of 2012 compared to $343 million in the same quarter of 2011. On per share basis, profits boosted by 36% to $2.38 from $1.75 in the same quarter last year. With this, the company has surpassed the Zacks Consensus Estimate by 16 cents per share.

Revenue in the quarter hiked 16% to $4.5 billion from $3.9 billion in the year-ago quarter, exceeding the Zacks Consensus Estimate of $4.4 billion.The increase was due to higher demand for trucks, power generation and construction markets in North America as well as strong growth in global mining markets. 

However, revenues were partially offset by weaker demand in the truck market in Brazil along with lower demand in the construction market in China and construction and power generation markets in Europe.

Earnings before interest and taxes (:EBIT) were $658 million, or 14.7% of sales in the quarter, up 24% from $532 million or 13.8% of sales in the first quarter of 2011.

Segment Accomplishments

Revenues from the Engine segment appreciated 20% to $2.9 billion. The increase in revenues was attributable to higher demand for heavy-, medium- and light-duty trucks in North America as well as increased demand in construction markets. The improvement was partially offset by lower sales in the Chinese construction market and Brazilian truck markets. The segment had EBIT of $381 million compared to $290 million in the corresponding quarter last year.

Revenues from the Component segment swelled 19% to $1.1 billion in the quarter. The increase was driven by higher demand in North America and Brazil that more than offset weaker demand in Europe and China. EBIT was $143 million or 13% of sales compared with $105 million or 11.4% of sales in the first quarter of last year.

Revenues from the Power Generation segment declined 2% to $780 million. The decrease was driven by lower revenue yield from the Middle East and Europe, which offset the benefits of improved demand in North America and Brazil. Segment EBIT was $76 million, or 9.7% of sales, compared with $89 million, or 11.2% of sales, in the first quarter of 2011.

Revenues from the Distribution segment scaled up 21% to $775 million, driven by strong growth in Asia-Pacific, North and Central America, and Europe and Africa. Segment EBIT was $94 million, or 12.1% of sales, compared with $89 million, or 13.9% of sales.

Financial Position

Cummins had cash and cash equivalents of $1.3 billion as of April 1, 2012 compared with $1.5 billion at the end of 2011. Long-term debt was $650 million as of April 1, 2012 versus $658 million at the end of 2011.  

Cash flow from operating activities declined to $21 million in the quarter from $88 million in the prior year. Capital expenditures increased to $126 million from $91 million in the first quarter of 2011.

Guidance

Cummins expects revenues to rise 10% in 2012. It also expects EBIT in the range of 14.5% to 15% of sales during the year.

Our Take

Cummins Inc. is a leading worldwide designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.

The company is well positioned to benefit from geographic diversification and leadership position in many of its end markets. New emission standards, fuel economy improvement and favorable trends for its Power Generation business will contribute to the growth of the company.

However, the company faces tough competition with companies including Caterpillar Inc. (CAT) and Navistar International Corporation (NAV). Currently, CMI retains a Zacks #3 Rank on its stock, which translates into a rating of Hold for the short-term (1 to 3 months) and we reiterate our Neutral recommendation on its shares for the long term (more than 6 months).

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