Lauren Rudd stocks column: Higher demand for truck engines gives Cummins a healthy outlook
Stocks columnist Lauren Rudd breaks down the rise of stocks for Cummins due to high demands of engines used in heavy- and medium-duty trucks.
Lauren Rudd stocks column: Higher demand for truck engines gives Cummins a healthy outlook Stocks columnist Lauren Rudd breaks down the rise of stocks for Cummins due to high demands of engines used in heavy- and medium-duty trucks. Check out this story on thenorthwestern.com: https://oshko.sh/2OIaC4x
Lauren Rudd, For USA TODAY NETWORK-Wisconsin Published 3:13 p.m. CT Aug. 16, 2018 | Updated 11:14 a.m. CT Aug. 17, 2018
Lauren Rudd(Photo: Courtesy of Lauren Rudd)
The recent volatility in the equity markets should be an impetus for you to do a little bargain hunting among shares that are depressed in price but have above average value potential. For example, one company that might be an intriguing research candidate is Cummins (CMI).
This Indiana-based corporation is a conglomeration of complementary business segments that design, manufacture, distribute and service a broad portfolio of power solutions.
The company's products range from diesel and natural gas engines to hybrid and electric platforms, as well as related technologies, including battery systems, fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems.
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Higher demand for engines and components used in heavy- and medium-duty trucks, along with an improved demand for mining and power generation equipment, is a plus for the company.
As a result, Cummins is poised to benefit from the increased engine and component demand for heavy- and medium-duty trucks in North America. Within the international markets, Cummins has raised its outlook for the light, medium and heavy-duty truck markets in China and Brazil. Moreover, it anticipates rising demand from mining customers and within the power generation marketplace.
The bottom line is a robust corporate focus on introducing innovative products and establishing partnerships and joint ventures to attract new business. In May of this year, the company announced the formation of a 50-50 joint venture with JAIC Motors to develop fuel-efficient and high-quality products.
Cummins anticipates an increased presence in China through its recent JAIC partnership and the launch of new products with its four partners in China, products that meet the region's required NS VI emission standards.
Over the past year, Cummins share price has been discouraging, chalking up a loss of 11.5 percent. Although the company announced record earnings for its second quarter, that news was immediately overshadowed by an engine recall that has already impacted 230,000 vehicles and could encompass an additional 500,000 heavy-duty trucks.
The recall is related to a failing catalyst that results in Cummins engines exceeding emissions control limits. The defective devices were first identified by the California Air Resources Board.
However the board stressed the recall is due to a degrading device and not a willful attempt to cheat emissions standards, as was seen in the Volkswagen emissions scandal.
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For the second quarter, Cummins reported earnings per share of $3.32, a 31 percent increase on a year-over-year basis. The company has exceeded earnings estimates nine times since the first quarter of 2016, as analysts have continuously underestimated Cummins's abilities.
Second quarter's results continue to show corporate strength. For example, revenues improved 20.8 percent, exceeding Street estimates of $5.8 billion by 5.3 percent and chalking up a new quarterly all-time high.
Unfortunately cost of goods sold outpaced sales, increasing 22.6 percent, which resulted in gross margins declining from 24.6 percent to 23.5 percent.
That is where the bad news ends because operating income accelerated 23.2 percent, while SG&A growth was only 1.2 percent, resulting in operating margins increasing to 11.8 percent from 11.5 percent.
Looking at dividend growth, the company's indicated dividend is $4.56 to yield 3.21 percent, and has an annualized 10-year growth rate of 12.56 percent. Cummins's payout ratio is 37 percent, which means it paid out only 37 percent of its trailing 12-month earnings as dividends, giving room for the dividend to grow.
The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $172 per share. My earnings estimate for this fiscal year is $13.50 per share with a 12-month projected share price of $155, yielding a 12.3 percent capital gain.
Lauren Rudd is a financial writer and columnist. You may write to him at Lauren.Rudd@RuddInternational.com. Phone calls accepted from 9 a.m. to 2 p.m. CDT at 941-706-3449.
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