Moody’s Investors Service, the credit rating agency controlled by Moody’s Corp. (MCO), lifted its investment-grade rating on Cummins Inc. (CMI) by one notch from “Baa3″ to “Baa2″, which is above the “junk” category.
The upgrade was based on the company’s expansion projects in the emerging countries and efficient restructuring measures to fight the latest economic downturn in North America.
The rating upgrade follows on the heels of the company’s raise of 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 Sep 1, 2010 to shareholders of record as of Aug 23, 2010.
Cummins last raised its dividend by 40% to 17.5 cents in July 2008. In fact, the company has been raising 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.
Cummins is well positioned to benefit from trends, such as new emission standards and fuel economy improvement. To consolidate its position in the engine division, the company invested heavily in capacity expansion and the introduction of new products.
Cummins’ new product launches include light-duty engines in the U.S. and China by 2010 and engines that meet the next wave of on-and off-highway emission standards in the U.S. and Europe over the next few years.
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.
We currently have a long-term Outperform recommendation on the stock.
Read the full analyst report on “CMI”
Zacks Investment Research
