Cummins Inc. (CMI) witnessed more than fourfold increase in profit to $246 million or $1.25 per share in the second quarter of the year from $56 million or 28 cents per share in the same quarter a year ago. The company also significantly outpaced the Zacks Consensus Estimate of 89 cents per share during the quarter.
The company’s results were backed by enhanced productivity and strong sales gains in its international markets. Sales in the non-U.S. markets, which accounted for 64% of the company’s revenue in the quarter, shot up 51% from the prior year.
Revenues in the quarter soared 32% to $3.21 billion, driven mainly by impressive sales gains in the company’s Engine and Components segments. It was higher than the Zacks Consensus Estimate of $2.85 billion.
Operating income more than tripled to $396 million from $121 million a year ago. Earnings before interest and taxes (EBIT) increased to $401 million or 12.5% of sales from $109 million or 4.5% of sales a year ago.
Segment Performance
Sales in the Engine segment surged 45% to $1.9 billion, driven by an increase in on-highway sales by 36% and industrial sales by 49%. Segment EBIT improved to $197 million or 10.4% of sales from a loss of $4 million in the prior year.
Sales in the Power Generation segment went up 16% to $708 million due to sales gains in India, China, Latin America and Russia. Segment EBIT was $76 million or 10.7% of sales compared to $41 million or 6.7% of sales a year ago.
Sales in the Components segment jumped 45% to $729 million. Segment EBIT improved to $75 million or 10.3% of sales versus a loss of $10 million in the previous year. This was attributable to higher volumes, increased aftertreatment product content and enhanced productivity.
Sales in the Distribution segment escalated 24% to $576 million with an organic growth of 7.5% from global aftermarket and industrial engine sales and services in support of construction and mining markets. Segment EBIT was $69 million or 12% of sales compared to $55 million or 11.9% of sales a year ago.
Financial Position
Cummins’ cash and cash equivalents remained almost flat at $924 million as of June 27, 2010 compared to the period ended December 31, 2009. Long-term debt amounted to $669 million as of June 27, 2010. This translated into a long-term debt-to-capitalization ratio of 15%, which was almost flat compared to the period ended December 31, 2009.
In the first half of the year, Cummins’ net operating cash flow increased to $427 million from $321 million in the prior year, driven primarily by an improvement in profit. Meanwhile, capital expenditures reduced significantly to $91 million from $139 million in the year-ago period.
Cummins has repurchased $123 million worth of its shares during the quarter. As of June 27, 2010, the company was left with $310 million worth of stock under its current $500 million repurchase authorization program.
Guidance Raised
Cummins raised its sales and EBIT guidance for 2010 based on higher profits. The company has now projected sales of $13 billion for the year, up from the previous guidance of $12 billion. The company now anticipates EBIT margin of 12% of sales, up from the prior outlook of 10% of sales.
Our Take
Cummins’ results and guidance fuel our optimism about the stock. The company is well positioned to benefit from new emission standards and fuel economy improvement through its innovative product launches. They include engines that would meet the next wave of on-and off-highway emission standards in the U.S. and Europe over the next few years. As a result, we have recommended the shares of the company as “Strong Buy” (Zacks #1 Rank) in the short term (1–3 months) and “Outperform” in the long term (6+ months).
Based on the impressive results, Cummins’ stock price opened at roughly $82 on Tuesday morning.
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