Recently Cummins Inc. (NYSE:CMI), a global power leader and manufacturer of diesel and natural gas related engines, came up with dismal quarterly earnings and weak 2014 guidance. The stock performance of the company was on the same line. However, not everything is bad for Cummins. In this article, I am going to focus on the economy and the industry growth in the geographies Cummins operates in.
Bad earnings followed by good industry outlook
Cummins Inc. (NYSE:CMI) reported total revenue of $4.3 billion, down 13% compared to the 4Q’11. EBIT was $552 million, down 18% from a level of $677 million a year ago. Quarterly EPS was down by 30% at $1.95 and yearly EPS dropped 9% at $8.67 from the previous year. International revenues decreased by 15% in 2012 compared to 2011. The company saw a significant sales-drop in Brazil, China and Europe as a result of the weakening economy and the impact of the transition to Euro IV emission standards.
Silver lining
All the major growing economies are coming out of a slowdown. Countries like India, China and Brazil have shown a major upward trend in their manufacturing activities and their GDP forecast are higher than their current level. In 2012, total commercial vehicle sales were about 2.6 million. According to a report by Frost and Sullivan, the expected figure for commercial vehicles in 2013 is 2.8 million, an increase of around 7.6%.
An outlook of the commercial vehicle market
The US market
Of the total sales of Cummins Inc. (NYSE:CMI), 62% comes from the US and Canada region. In this region, Cummins is the market leader with a share of about 39%. This market is set to grow in the year 2013. According to a report by Polk Views, new commercial vehicle registration in the US is forecast to grow by around 8% in the year 2013 over 2012. With 583 thousand new vehicle registrations in 2013, the US market has witnessed about 50% growth over the past four years.
New commercial vehicle registration in the US (figures in thousands):
| 2009 | 2010 | 2011 | 2012 | 2013 |
Chinese market
The Chinese market accounts for 15% of Cummins’ total sales. Chinese manufacturing data for the latest months was better than the expected. China is showing great signs of recovery as production and orders are picking up. Purchasing Managers’ Index was 51.7 in March compared with 50.4 in February. A reading above 50 indicates expansion. Besides, China has seen a decline in the goods transported by rail since 2000 from 69% to 39% (2010), which has increased the potential demand for road-bound freight traffic. Though the majority of the truck manufactures are local players in China, engine providers are multinational companies like Cummins. Cummins operates joint ventures in economies like China and India.
Russian Market
Russia has seen a major loss in its commercial vehicle market during the recession. According to a KPMG report, Russia’s commercial vehicle market collapsed about 50% in 2009. The main characteristic of the Russian market is the dependence of the local demand on exports. With signs of recovery, the Russian market is expected to show a demand surge for commercial vehicles.
Due to the rapid recovery and the growth pattern the commercial vehicle market is showing, the number of units sold in 2015 is expected to be at 33 million, a growth of about 26% over a period of 3 years.
Total world demand for the commercial vehicle, geography-wise, in 2013:
| (in 2013) | HCV | MCV |
| North America | 280,000 | 230,000 |
| South America | 140,000 | 70,000 |
| China | 730,000 | 270,000 |
| India | 159,000 | 141,000 |
| Russia | 94,800 | 25,200 |
| Europe | 240,000 | 60,000 |
Data Source: Website; Table- stockriters.com
With its presence and market share in all these economies, I expect Cummins to see sales growth of around 6-7% in the next two to three years.
Client Base
Its client base consists of major truck and heavy-vehicle manufacturers such as PACCAR Inc., Daimler Trucks North America, Ford Motor Company (NYSE:F), and International Truck. These players capture around 80% of the world’s commercial vehicle market. In the light-duty on-highway engines segment, Cummins Inc. (NYSE:CMI) supplies Dodge Ram Truck engines to Chrysler, which accounts for 8% of the company’s consolidated sales, making Chrysler the company’s largest customer.
Very strong dividend growth and positive outlook
Though over a significant period the stock movement has been flat and investors might not have gotten the returns they would have expected, the dividend yield and growth are very attractive. Over a period of six years, the dividend has increased by an average rate of 25%. The current yield is 1.7%.
Cummins Inc. (NYSE:CMI) is an analysts’ favorite. Its average target price of about $145 shows a potential upside gain of around 35% from the current price. This optimism is based on the expected growth in demand.
Competitors
Some of the big names that operate in the same industry:
Caterpillar Inc. (NYSE:CAT), operates in two segments, Machinery and Finance. This company is mired more by the demand slump in gold, as the company provides equipment mainly to gold-mining companies. Its 4Q’12 performance was very disappointing. Total revenues were 7% down and EPS was down more than 100% to a level of $1.04, from the $2.32 level in the same quarter last year. However, the dividend is growing at a steady pace of 8-9% Y-o-Y.
Conclusion
Major economies are recovering fast and picking up on their manufacturing activity. This will drive the demand for commercial vehicles and heavy and medium vehicle engines. Cummins has geographical diversification and a client base to take complete advantage of the growth taking place in the economy and the sector. Besides, the company has a strong dividend policy that can hold the investor seeking constant returns. I keep my views bullish on Cummins and expect it to touch a level of $145 by the end of the year.
The article Commercial-Vehicle Industry Outlook Augurs Well for This Stock originally appeared on Fool.com.
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