Cummins (CMI) Beats Q3 Earnings Estimates, Revises View

Cummins Inc.’s (NYSE:CMI) adjusted earnings per share decreased 5.6% to $2.02 in the third quarter of 2016 from $2.14 earned in the year-ago quarter. The bottom line, however, surpassed the Zacks Consensus Estimate of $1.93. Including the impact of one-time items, net income fell to $289 million from $380 million in the third quarter of 2015.

Revenues declined 9% year over year to $4.19 billion in the reported quarter. Moreover, the figure missed the Zacks Consensus Estimate of $4.26 billion. The year-over-year decline was due to lower truck production in North America and weak international demand for power generation equipment.

Operating income decreased significantly to $384 million from $557 million a year ago. Earnings before interest and taxes (“EBIT”) dropped to $398 million (9.5% of sales) from $577 million (12.5% of sales) a year ago.

Segment Performance

Sales in the Engine segment fell 12% to $1.9 billion due to a 13% decline in on-highway revenues, resulting from weaker heavy and medium-duty truck production in North America. The segment’s EBIT decreased to $89 million (4.8% of sales) from $217 million (10.3% of sales) a year ago.

Sales at the Components segment fell 8% to $1.1 billion owing to lower sales in North America, attributable to lower medium and heavy-duty truck production, partially offset by higher revenues in China. This segment’s EBIT declined to $148 million (12.9% of sales) from $156 million (12.6% of sales) in the prior-year quarter.

Sales at the Power Systems segment fell 13% to $856 million due to a drop in demand for power generation equipment and industrial engines in Asia, the Middle East and Africa. The segment’s EBIT declined to $59 million (6.9% of sales) in third-quarter 2016 from $74 million (7.5% of sales) in third-quarter 2015.

Sales at the Distribution segment dropped 3% to $1.5 billion. Revenues benefited from the company’s acquisitions undertaken. However, this gain was offset by adverse currency movements and lower organic sales. The segment’s EBIT fell to $96 million (6.4% of sales) from $123 million (7.9% of sales) a year ago.

Financial Position

Cummins’ cash and cash equivalents decreased to $1.25 billion as of Oct 2, 2016, from $1.71 billion as of Dec 31, 2015. Long-term debt totaled $1.63 billion as of Oct 2, 2016, compared with $1.62 billion as of Dec 31, 2015.

In the first nine months of 2016, Cummins’ net operating cash flow increased to $1.31 billion from $1.13 billion in the same period a year ago. Capital expenditures decreased to $312 million from $393 million in the prior-year period.

Capital Deployment

Cummins is focused on enhancing shareholder value by pursuing aggressive share repurchases and increasing dividend payouts. The company returned $1.3 billion to shareholders in the first nine months of 2016 through dividends and share repurchases. This is consistent with Cummins’ plans to return 75% of its full-year operating cash flow to shareholders.

2016 Guidance

For 2016, Cummins expects its revenue to decline 9%, consistent with its prior guidance of a decline of 8%−10%. The EBIT guidance was reduced to 11.3% from the prior range of 11.6%–12.2% due to an increase in the expected costs of a loss contingency in the third quarter.

CUMMINS INC Price, Consensus and EPS Surprise

CUMMINS INC Price, Consensus and EPS Surprise | CUMMINS INC Quote

Zacks Rank

Currently, Cummins carries a Zacks Rank #2 (Buy).

Some other well-ranked stocks in the auto space include Spartan Motors Inc. (NASDAQ:SPAR) , Gentex Corp. (NASDAQ:GNTX) and Standard Motor Products Inc. (NYSE:SMP) .

Standard Motor has a long-term expected growth rate of 15%, better than the industry average of 12.30%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Spartan Motors, carrying a Zacks Rank #2, has a long-term expected growth rate of 15%, compared to the industry average of 12%.

Gentex, also a Zacks Rank #2 stock, has a long-term expected growth rate of 11.20%.

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