When you get right down to it, Tuesday's first-quarter earnings report for Cummins (CMI)
is very simple.
The company raised its guidance for 2011 revenue to $17 billion, up from the earlier guidance of $16 billion, and increased its projected EBIT (earnings before interest and taxes) to 14%, from 13.5%. That works out to an increase in projected 2011 earnings to $7.75 a share, from the $7.24 a share Wall Street consensus before the company reported.
To figure out what the stock is worth, you now have to answer just two questions.
First, do you think this quarter represents the top of the cycle for this maker of truck engines and backup power systems? Or is it more like the middle of the cycle, with lots of sweet-spot exposure still ahead?
Second, do you believe the company’s projections?
I think both are easy questions to answer after this quarter.
Cummins is clearly firing on all cylinders -- and will keep firing at that pace until 2014 or so. In other words, the company is in the middle of the cycle and not the end.
The North American truck market is still working off a huge backlog of delayed sales from the recession. The U.S. truck fleet came out of the recession with an average age of seven years, the highest average in 20 years.
It now looks like sales of Class-8 trucks -- the big rigs -- will continue at a double-digit annual rate through 2014. Investors also get a little extra margin of safety from Cummins’ huge installed base -- the company had about 50% of the U.S. heavy-truck market during the last two years.
That means continuing revenue from the company’s distribution and components businesses, as Cummins services its sales, will even out any bumps selling new trucks and engines. Together, those units make up about a third of gross sales.
Outside North America, sales are growing at a stunning rate. This quarter, Cummins reported, sales grew by 66% in China, 31% in India, 39% in Brazil, and 40% in Africa and the Middle East. Sales outside the United States now make up 61% of all sales.
And this was a hugely believable quarter -- which increases the credence I put in the company’s guidance for the rest of 2011. The company hit all its benchmarks.
In earlier guidance Cummins had said that margins on engine sales, for example, would come in at 10% to 11% -- this quarter they came in at 12.1%. Cummins’ components margin, to take another example, had been projected at 10% to 11%. It came in at 11.4%.
The cost-cutting that the company did during the recession -- Morningstar calculates that Cummins reduced fixed costs by $600 million -- has resulted, in my opinion, in permanent improvements in the company’s margins.
If, after digesting all this, you decide to keep the multiple that you’ll pay for Cummins’ $7.75 in 2011 earnings at the same level as when the company was projected to earn $7.24—I’m using the same 19.4 multiple as Standard & Poor’s does -- you get a new target price of $150 a share by December 2011.
So, as of Apr. 27, I’m raising my target price for Cummins in my Jubak’s Picks portfolio to $150 a share by December, from the previous $136.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Cummins as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.