Stock Update (NYSE:CMI): Cummins Inc. Reports 3Q:16 Results

cmiCummins Inc. (NYSE:CMI) reported results for the third quarter of 2016.

Third quarter revenues of $4.2 billion decreased 9 percent from the same quarter in 2015. Lower truck production in North America and weak international demand for power generation equipment were the most significant drivers of the decline in sales. Currency negatively impacted revenues by approximately 2 percent compared to last year, primarily due to a stronger US dollar.

Revenues in North America decreased 13 percent while international sales declined by 3 percent. Within international markets, higher revenues in China partially offset declines in the Middle East and Africa.

Earnings before interest and taxes (EBIT) were $398 million in the third quarter, or 9.5 percent of sales, and included a $99 million increase in an existing accrual for a loss contingency. EBIT in the third quarter of 2015 was $577 million or 12.5 percent of sales.

Net income attributable to Cummins was $289 million ($1.72 per diluted share). The loss contingency charge, net of its impact on compensation plans, reduced diluted earnings per share by 30 cents. The tax rate in the third quarter of 2016 was 21.5 percent. Net income in the third quarter of 2015 was $380 million ($2.14 per diluted share).

“Due to the slow pace of growth in the global economy, we continue to face weak demand in a number of our most important markets,” said Cummins Chairman and CEO Tom Linebarger. “The restructuring actions that we initiated in the fourth quarter of 2015, combined with strong execution on material cost reduction initiatives, productivity gains and improvements in product quality are all helping to mitigate the impact of weaker revenues. We are on track to deliver our goal of 25% decremental EBIT margin for the full year 2016, as a result of strong operational performance in very challenging economic conditions. We have returned $1.3 billion to shareholders so far this year, through a combination of dividends and share repurchases, consistent with our plans to return 75 percent of operating cash flow to shareholders in 2016.”

Based on the current forecast, Cummins expects full year 2016 revenues to be down 9 percent, consistent with its prior guidance of down between 8 and 10 percent. Full year EBIT is expected to be 11.3 percent of sales, down from the prior forecast of 11.6 to 12.2 percent. The reduction in EBIT guidance is primarily a result of an increase in the expected costs of a loss contingency in the third quarter. As disclosed in prior quarters, the loss contingency relates to the costs of a campaign to remedy quality issues with third party aftertreatment systems, which were sourced by one of our OEM customers and are paired with our engines in the OEM vehicle.

Other recent highlights:

  • Cummins was recognized with the 2016 United States Overall Best Heavy-Duty Truck Engine Supplier Leadership Award by Frost and Sullivan
  • The Company announced that it will partner with Peterbilt Motors Company, a division of PACCAR, to develop and demonstrate technologies under the U.S. Department of Energy Supertruck II program
  • Cummins has been inducted into the Billion Dollar Roundtable for its commitment to diversity and inclusion
  • The Company returned $1.3 billion to shareholders so far this year, through a combination of dividends and share repurchases

Third quarter 2016 detail (all comparisons to same period in 2015)

Engine Segment

  • Sales – $1.9 billion, down 12 percent.
  • Segment EBIT – $89 million, or 4.8 percent of sales, compared to $217 million or 10.3 percent of sales
  • Segment EBIT reflects a $99 million increase in an existing accrual for a loss contingency
  • On-highway revenues declined 13 percent primarily due to lower heavy and medium-duty truck production in North America

Distribution Segment

  • Sales – $1.5 billion, down 3 percent
  • Segment EBIT – $96 million, or 6.4 percent of sales, compared to $123 million or 7.9 percent of sales
  • Increased revenue from acquisitions was more than offset by a 5 percent decline in organic sales and a 1 percent unfavorable impact from currency

Components Segment

  • Sales – $1.1 billion, down 8 percent.
  • Segment EBIT – $148 million , or 12.9 percent of sales, compared to $156 million or 12.6 percent of sales
  • Revenues in North America declined due to lower medium and heavy-duty truck production, partially offset by higher revenues in China

Power Systems Segment

  • Sales – $856 million, down 13 percent
  • Segment EBIT – $59 million, or 6.9 percent of sales, compared to $74 million, or 7.5 percent of sales
  • Revenues declined due to lower power generation and industrial engine demand in Asia, the Middle East and Africa (Original Source)

Shares of Cummins are down nearly 3% to $124.04 in pre-market trading Tuesday. CMI has a 1-year high of $131.04 and a 1-year low of $79.88. The stock’s 50-day moving average is $124.04 and its 200-day moving average is $118.21.

On the ratings front, Cummins has been the subject of a number of recent research reports. In a report issued on October 11, Jefferies analyst Stephen Volkmann reiterated a Hold rating on CMI, with a price target of $120, which implies a downside of 6% from current levels. Separately, on the same day, Goldman Sachs’ Jerry Revich upgraded the stock to Buy and has a price target of $162.

According to, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Stephen Volkmann and Jerry Revich have a yearly average return of 8.7% and 6.3% respectively. Volkmann has a success rate of 61% and is ranked #244 out of 4178 analysts, while Revich has a success rate of 58% and is ranked #635.

Overall, one research analyst has rated the stock with a Sell rating, 6 research analysts have assigned a Hold rating and 2 research analysts have given a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $129.00 which is 0.9% above where the stock closed yesterday.

Cummins, Inc. operates as a diesel engine manufacturing company. It engages in the designing, manufacturing, marketing, distribution and servicing of diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust after-treatment, fuel systems, controls, air handling and power generation systems. Cummins sells its products to original equipment manufacturers, distributors and other customers worldwide. The company operates in four segments: Engine, Power Generation, Components and Distribution. The Engine segment manufactures and markets a broad range of diesel and natural gas powered engines under the Cummins brand name, as well as certain customer brand names, for the heavy- and medium-duty truck, bus, recreational vehicle, light-duty automotive, agricultural, construction, mining, marine, oil and gas, rail and governmental equipment markets. The Components segment supplies products which complement its Engine segment, including filtration products, turbochargers, after-treatment systems, intake and exhaust systems and fuel systems for commercial diesel applications. The Components segment consists of four businesses: Emission Solutions, Turbo Technologies, Filtration and Fuel Systems. The Power Generation segment designs and manufactures most of the components that make up power generation systems, including engines, controls, alternators, transfer switches and switchgear. The Power Generation businesses segment consists of Commercial Products, Generator Technologies, Commercial Projects, Consumer and Power Electronics. The Distribution segment consists of many company-owned and joint venture distributors that serves and distributes its products and services to end-users. The Distribution segment consists of Parts and Filtration, Power Generation, Engines and Service. 


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