Cummins Revs Up Its Engines to Start 2017

Large portions of the industrial economy have suffered dramatically in recent years, with weakness concentrated in the construction, mining, and energy sectors due to weak commodities markets and sluggish economic conditions. Those poor conditions have weighed on Cummins (NYSE: CMI), because as an engine manufacturer for the heavy equipment that those industries use, weak customers mean weak sales.

Coming into Tuesday's first-quarter financial report, Cummins investors had already anticipated that revenue and income levels would drop from year-ago levels. Yet Cummins surprised its shareholders with far better results than anticipated, and the engine-maker boosted its guidance for the full 2017 year as a result. Let's take a closer look at Cummins to see why things are going well and what's coming in the future.

Image source: Cummins.

Cummins enjoys an economic rebound

Cummins' first-quarter results reflected a bounce in its key target industries. Sales climbed 7% to $4.59 billion, which was far better than the consensus forecast for just $4.15 billion in revenue. Similarly, net income climbed by nearly a quarter to $396 million, and that produced earnings of $2.36 per share. Compared to the $1.80 per share that most investors were expecting to see, Cummins had a blowout quarter.

Taking a closer look at the report, Cummins cited strong demand from construction and mining customers for a large part of the company's overall gains. Even though weaker truck production in North America offset some of Cummins' gains, acquisitions also helped bolster the company's business. That disparity showed up in the engine manufacturer's geographical numbers, with North American sales gaining just 1% while international sales jumped 17% from year-ago figures on strength in China and Europe.

Sales at Cummins were up across the board at its primary business units. The engine segment showed the weakest gains, with just a 2% rise in sales, but segment profit was up 16% from year-ago levels on a pre-tax basis. Off-highway revenue gains offset losses in the on-highway arena. The distribution unit saw the largest sales gains of 12%, with about half of that increase coming from acquisitions, and pre-tax profit was up 15%. The components business posted high single-digit percentage growth in both revenue and earnings on China strength, while the power systems division had similar sales gains and saw segment profit jump by nearly a quarter, thanks to increased demand from the mining and energy industries.

Can Cummins keep climbing?

CEO Tom Linebarger tried to put Cummins' results in the broader context of its long-term strategic plans. "We launched our fully updated range of engines for North American truck and bus markets," Linebarger said, "offering improved performance and better fuel economy for our customers." The CEO also pointed to its efforts to become the leading supplier of powertrains through a joint venture with Eaton (NYSE: ETN).

Yet the near-term impact of the turnaround on Cummins promises to be huge. Upward revisions to 2017 guidance were substantial, with Cummins now looking for sales gains of 4% to 7% rather than the flat to down 5% performance that it previously anticipated. Similarly, the company boosted its pre-tax profit margin figures from its previous forecast of 11% to 11.5% to a new range of 11.75% to 12.5%. Combine up to a full percentage point of margin improvement with as much as a 12 percentage point swing in sales growth, and the boost to Cummins' bottom line could be massive.

Cummins investors responded favorably to the news, and the stock jumped more than 5% in pre-market trading following the announcement. If industry conditions continue to improve at the pace that the company anticipates, then Cummins could finally have reached the cyclical upswing that the engine maker has waited to see for a long time.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins. The Motley Fool has a disclosure policy.