A Stock About to Step on the Gas Next Week?
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite crushing Street estimates in its last quarter, Cummins (NYSE: CMI) couldn’t escape Mr. Market’s hammering as it failed to spice up its full-year earnings guidance. Cummins’ shares have been in free fall since then, shedding more than a quarter of their value in the past three months. Blame the frequent injections of miserable manufacturing data, slowdown signals from the trucking market, and then the big blow in the form of a cut in revenue forecast from the company.
Though expectations from Cummins aren’t really great at this point of time, it will be interesting to see how it fares as it declares its second-quarter numbers next week.
Flat tires in house…
The health of the trucking industry has a direct impact on Cummins’ sales, as its engines are most widely used in in heavy- and medium-duty trucks. And of all the markets, the North American truck market is the most critical, as it accounts for more than half of Cummins’ engine division (which is also the largest) sales. The problem now is that this market was in high gear till last quarter, but not anymore.
Truck tonnage over the past two months has declined, and freight volumes remain muted. Truck deliveries are higher as compared to last year, but the steep sequential decline is worrisome. For instance, U.S. medium- and heavy-duty truck sales climbed 39%, 17%, and 6% (all year-on-year) in the months of April, May, and June, respectively. And it’s going to take a toll on Cummins’ second-quarter revenue as well.
The real concern lies not in the U.S., but elsewhere. If the trio of China, India, and Brazil helped Cummins churn out a record second quarter last year, they are likely to be the dampeners this time. Hints of a slowdown in these markets were visible even during the first quarter, when Cummins’ international revenue dipped by around 2%. Worsening of the situation in Brazil has even compelled Daimler and Volvo to curtail truck production.
The situation isn’t any different in India. Truck sales for the nation’s biggest truck maker Tata Motors (NYSE: TTM) slumped by more than 25% in the past three months, compelling it to resort to production cuts for some days. Incidentally, Cummins has a 50:50 joint venture with Tata Motors, which is also one of its most important tie-ins in terms of contribution to its total joint venture income. Though this venture helped drive Cummins’ earnings up till the last quarter, things could be different this time around.
To top these concerns, the U.S. dollar has strengthened considerably against many currencies lately. This isn’t good news for Cummins which derives more than half its revenue from international markets. It looks like Cummins’ second-quarter revenue will actually be lower than last year’s by at least 3-4%, as analysts have estimated.
Spice in the gas
If second-quarter numbers look unimpressive, so could Cummins’ growth plans be. Not that its engines are running out of gas; engines made in collaboration with Westport Innovations (NASDAQ: WPRT) continue to find favor with industry players. I’d definitely like to have the progress report of its heavy-duty ISX12 G engines, which are supposed to go into full production next year. That’s because companies like PACCAR (NASDAQ: PCAR), which is also Cummins’ largest and oldest customer, are already warming up to these engines. PACCAR has already kicked off production of its new truck models that were displayed fitted with this engine during their launch some months back.
But the nat-gas conversion excitement has remained pretty subdued after a highway bill aimed at giving tax incentives to companies buying nat-gas vehicles hit another speed bump some months back. Cummins too hasn’t really announced any major tie-in or customer addition for its engines in the past few months.
Nevertheless, there might be some ‘spice’ in the call if questions about Navistar International (NYSE: NAV) pop up. Cummins’ shares popped late last month when rumors that Navistar could opt for its engines surfaced. Till then, the U.S. Environmental Protection Agency's decision on Navistar’s engine technology was still unknown. What followed in the next few days was hell for Navistar, but could be a potential gain for Cummins. With the EPA pulling the plug on Navistar’s ambitious technology, the company might have to resort to Cummins’ engines till it can get back on its feet. Any hint of this in the upcoming call, and Cummins’ shares could soar irrespective of numbers.
The Foolish conclusion
Whatever be the case, most concerns already seem to have been factored in Cummins’ shares which is trading well within 10% of its 52-week low. I told you recently what a compelling buy Cummins looks like. I’m re-iterating it—any dip in its shares anytime will mean an opportunity for a value bet.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Cummins, PACCAR Inc, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.