Cummins Inc. (CMI) raised its quarterly cash dividend by 50% to 26.25 cents per share, driven by its strong performance in the past few quarters. The dividend will be paid on September 1, 2010, to shareholders of record as of August 23, 2010.
Cummins, a manufacturer and distributor of engines, power generation systems and related components, last raised its dividend by 40% to 17.5 cents in July 2008. In fact, the company had earlier raised its dividend payment from the third quarter of every year since 2007. However, the company had put dividend hikes on hold last year due to the global economic crisis.
With respect to earnings surprise, Cummins performed extremely well in the past few quarters. The company outdid the Zacks Consensus Estimate by 114.29%, 85.14%, 51.35% and 15.38% in the trailing four quarters. This translated into an average earnings surprise of 66.54%, implying that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
In the first quarter of 2010, Cummins posted an improvement in profit to $149 million or 75 cents per share from $7 million or 4 cents per share in the same quarter a year ago. With this, the company has more than doubled the Zacks Consensus Estimate of 35 cents per share.
Operating income improved more than eightfold to $246 million from $29 million a year ago. Earnings before interest and taxes (EBIT) increased to $266 million or 10.7% of sales from $94 million or 4% of sales a year ago, excluding restructuring charges.
Sales in the quarter increased marginally by 2% to $2.48 billion as growth in the company’s Components and Distribution segments more than offset the decline in the Engine and Power Generation segments.
The first quarter results were driven favorably by continued strength in China, India and Brazil, partially offset by a weak demand in North America with medium-duty truck, bus and heavy-duty engine shipments decreasing 80% on a year-over-year basis.
Cummins has projected sales of $12 billion for 2010, up from the previous guidance of $11 billion for 2010. The company now anticipates EBIT margin of 10% of sales, up from the prior outlook of 7% of sales.
The company continues to expect capital expenditure of $400 million in 2010, an increase of nearly 30% over 2009, to fund projects critical to the company’s long-term growth.
Over the last 30 days, as many as 4 analysts have raised the estimates for both the upcoming quarter and the full year 2010, while none moved it in a downward direction. For 2011, as many as 3 analysts have raised their estimates while none moved it downward. We expect more upward revisions in estimates based on the company’s decision to hike dividend payments.
The current Zacks Consensus Estimates for the second quarter and full-year 2010 are profits of 87 cents and $3.87, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, are 8.05% and 1.55%, respectively.
Based on the favorable trend in estimates and the company’s improved results and guidance, we recommend the stock as Buy (Zacks #2 Rank) in the short term (1–3 months) and Outperform in the long term (6+ months).
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