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Cummins (CMI) Up 3.1% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Cummins (CMI). Shares have added about 3.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cummins due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cummins Q4 Earnings Miss Estimates, Revenues Beat

Cummins reported adjusted earnings of $3.48 per share in fourth-quarter 2018, missing the Zacks Consensus Estimate of $3.82. In the year-ago quarter, it recorded adjusted earnings per share of $3.03.

During the reported quarter, net income attributable to Cummins was $579 million against net loss of $274 million in the prior-year quarter.

Revenues improved 12% year over year to $6.13 billion in the reported quarter. The top line surpassed the Zacks Consensus Estimate of $6.09 billion. The year-over-year rise was due to increased truck production in North America, and strong demand for construction and power generation equipment across all markets.

Earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $896 million (14.6% of sales) from $769 million (14% of sales) recorded in the prior-year quarter.

2018 Results

In 2018, Cummins reported net income of $2.1 billion or $13.15 per share, up from $999 million or $5.97 per share in the previous year.

Revenues for the year went up 16% year over year to $23.8 billion.

Segmental Performance

Sales at the Engine segment grew 18% to $2.7 billion on the back of 17% increase in on-highway revenues and 21% in off-highway revenues. The segment’s EBITDA increased to $393 million (14.6% of sales) from $271 million (11.8% of sales) a year ago.

Sales at the Distribution segment increased 6% to $2.1 billion. Revenues benefited from 6% rise in the North American segment and 5% growth in international markets. The segment’s EBITDA rose to $140 million (6.8% of sales) from $123 million (6.3% of sales) a year ago.

Sales at the Components segment increased 14% to $1.8 billion, owing to revenue growth of 23% in North America in addition to 3% increase in international sales. The segment’s EBITDA was $278 million (15.7% of sales) compared with the year-ago figure of $214 million (13.7% of sales).

Sales at the Power Generation segment improved 9% to $1.2 billion, banking on a 13% increase in power generation revenues. The segment’s EBITDA rose to $123 million (10.3% of sales) in fourth-quarter 2018 from $125 million (11.3% of sales) in the year-ago quarter.

Sales at the Electrified Power segment were $2 million while it witnessed EBITDA loss of $29 million.

Financial Position

Cummins’ cash and cash equivalents were $1.3 billion as of Dec 31, 2018, compared with $1.37 billion as of Dec 31, 2017. Long-term debt totaled $1.6 billion as of Dec 31, 2018, almost similar to the figure recorded as of Dec 31, 2017.

At the end of 2018, Cummins’ net operating cash inflow was $2.4 billion compared with $2.3 billion in the same period of 2017. Capital expenditure was $709 million, marking an increase from $506 million in 2017.

Capital Deployment

During 2018, Cummins returned $1.9 billion or 78% of operating cash flow to shareholders in forms of dividends and share buybacks. In the last year, it invested $1.14 billion to repurchase shares and $718 million to pay dividends.

Guidance

For 2019, Cummins projects revenues to be flat to up 4%. Moreover, EBITDA is expected to be 15.75-16% as a percentage of sales. Further, the company anticipates returning 75% of operating cash flow to shareholders in forms of dividends and share repurchases.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Cummins has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cummins has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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