With more than 50% of sales coming from the emerging markets and China, Cummins (CMI) has powered its way higher. But can the company stay on the road amid a weak North American engine market?
Year to date, shares of shares of Indiana-based Cummins are up almost 50%. Investors have ignored the company's weak North American results and focused on the emerging markets of Brazil, India and China.
In 2015, revenue declined 1% to $19.1 billion and earnings per share of $7.84 was down 13% from a year earlier. For 2016, revenue is expected to be down 9% on EPS of about $8.18. Earnings per share should be 4% higher because of a slightly lower tax rate and an active share buyback program.
Second-quarter results were weak. Sales of $4.528 billion were down 9.7%, year to year. Gross margins were flat at 26.4% and earnings before interest and taxes (EBIT) was $591 million, down 18%. Earnings per share of $2.40 compared to $2.62 in the year-ago quarter.
Heavy-duty truck engine sales were $622 million, a 29% decrease. Medium-duty truck and bus sales were $600 million, 11% lower than the previous year. The only bright spot was light-duty automotive, which had sales of $394 million, an increase of 11%.
In its presentation, company management provided a forecast for the 2016 engine market. North American Class 8 engine shipments are expected to be down 31% to just 200,000 units. Medium duty, Class 6-7, is projected to decline 6% to 117,000 units.
Only heavy- and medium-duty engine sales in China (+9%) and India (+15%) are expected to be up this year. And that's the problem with the stock.
North American engine demand has weakened all year forcing Cummins to initiate a global restructuring aimed at eliminating more than 2,000 positions and saving as much as $200 million. While a restructuring helps earnings, it does nothing for revenue growth.
The stock has run 50% on pretty flimsy results. Investors want to pretend North American demand will come back because of an aging truck fleet, but it doesn't seem to be happening. How long before sales to China and India begin to slow? Sales to Brazil, once a bright spot, are down 20%.
After the move the stock has made, who wants to be fully invested when news of a surprise slowdown happens? Take profits. This engine has reached peak power.