FOR THE TRIBUNE
Cummins Inc. continued to offer a conservative forecast for sales growth this year while reporting a 7 percent increase in first-quarter sales.
The Columbus-based Fortune 200 company announced Tuesday that sales from January through March increased from $4.4 billion to $4.7 billion compared to a year earlier. Additionally, earnings before interest and taxes jumped from $528 million to $562 million; and net income increased from $338 million ($1.83 per diluted share) to $387 million ($2.14 per diluted share), Cummins reported.
“Record profitability in our components segment, execution of our distributor-acquisition strategy, the successful launch of new products in China and improved results in our Power Generation business all contributed to earnings growth in the first quarter. Strong performance in these areas more than offset the impact of weak demand in a number of international markets,” Cummins Chairman and CEO Tom Linebarger said in a news release.
Cummins said it expects full-year revenues to grow between 2 and 4 percent, the same projection the company gave in February when it announced fourth-quarter and year-end results for 2014.
The company also offered a conservative sales forecast to start 2014, after coming off a slight-year-end revenue decline in 2013. However, stronger demand in North American markets prompted Cummins to increase its forecast each quarter, and the company’s year-end revenue reflected an 11 percent increase.
“We expect profitability for the remainder of the year to increase from first-quarter levels as revenues improve and we capture more benefits from cost-reduction activities,” Linebarger said Tuesday.
Currency issues related to a strong U.S. dollar and weak demand in multiple international markets prevented Cummins from offering a more robust sales forecast for the year, the company said, as was the case in the fourth quarter report.
International sales declined 6 percent in the first quarter. In particular, revenues were lower in Europe and Brazil, which offset growth in China, Cummins said.
The Power Generation segment experienced weaker demand in Eastern Europe, but higher revenues in Asia, Africa and the Middle East resulted in overall sales rising 6 percent, to $680 million.
Overall company sales growth was driven by stronger demand in on-highway markets and acquisitions of North American distributors. Revenues in North America increased 17 percent and helped sales in the Engine and Components segments.
Sales increases in the heavy-duty truck, medium-duty truck and bus, and stationary power markets offset dips in the light-duty automotive and industrial markets for the Engine segment. The segment recorded sales of $2.6 billion, a 1 percent increase, as it experienced weaker demand in construction, marine and mining markets.
Stronger demand in on-highway markets in North America and China helped sales in the Components segment increase 6 percent, to $1.3 billion. Sales increased in the emissions solutions and fuel systems markets.
The Distribution segment offered mixed results. Stronger demand in Asia Pacific and acquisitions helped the segment’s sales increase 55 percent, to $1.5 billion. Sales in the parts and filtration, engines, power generation and service markets increased. Cummins has been executing a strategy of purchasing its North American distributors, and first-quarter segment earnings reflected a $6 million gain resulting from the purchase of a controlling interest in a North American distributor. However, without the acquisitions, sales were down 2 percent and revenues were offset by currency issues.
Cummins returned $277 million to shareholders in the first quarter through dividends and stock repurchases. The company repurchased 1 million shares in the quarter. Linebarger said these actions are consistent with the company’s plans to return 50 percent of full-year operating cash flow.
Cummins stock closed at $137.25 per share, down $2 from Monday’s closing of $139.25, a 1.4 percent drop.
Analysts react
The reaction from analysts was that Cummins is doing well considering challenges with currency and international markets, but the stock price dip shows that Wall Street was expecting better results.
Craig Kessler, president and chief investment officer of Kessler Investment Group LLC in Columbus, described the first three months as a “bread and butter” type of quarter for Cummins. The company is having success in initiatives and watching costs while turning in steady, if unspectacular results, he said.
“This is a very solid quarter in a very difficult environment. I think they should feel good about what they’ve accomplished,” Kessler said.
Analysts said the strong growth in North America and the improved performance of the Power Generation segment are good signs.
One area where performance didn’t meet expectations was earnings per share, said Scott DeDomenic, a senior vice president and analyst with Hilliard Lyons. Wall Street was expecting $2.12 per share, and while Cummins announced $2.14, the true number was $2.04. That’s because the company received a favorable federal tax ruling and could apply $18 million toward earnings, DeDomenic said.
Besides earnings per share, analysts also pointed to smaller profit margins as a slight concern, particularly with the Engine segment. While sales increased by $39 million from first quarter 2014 to this year, the number of engines sold in its various markets dropped from 151,100 to 144,600. Profit margins can be affected when staffing and inventory are set for a certain sales goal, but that goal isn’t met, DeDomenic said.
The fact that Cummins is a much more diverse company than it was 10 or 15 years ago has allowed it to experience sales growth despite headwind conditions, said Rich Hummel, director of research for Columbus-based adviser Kirr, Marbach & Co.
And the company is acting wisely by rewarding shareholders by repurchasing stock and paying dividends and by investing in the company, he said.
“This shows the company is being well run,” Hummel said.
[sc:pullout-title pullout-title=”Cummins stock price” ][sc:pullout-text-begin]
Tuesday’s close: $137.25
Monday’s close: $139.25
Change: $2 (1.4 percent)
[sc:pullout-text-end]