Cummins Earnings Keep Climbing Despite International Pressure

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The global economy relies on a reliable flow of goods moving around the world, and to power the transportation equipment that moves those goods, engines from Cummins play a vital role. Coming into Tuesday morning's second-quarter financial report, Cummins investors were undoubtedly nervous about the engine-maker's ability to keep growing, given the macroeconomic cyclical slowdowns that have popped up throughout the world market. For its part, Cummins was able to beat fairly modest expectations, but the longer-term question is whether strength in its domestic business can outlast poor conditions overseas and keep the company growing overall at the pace that investors really want to see. Let's take a closer look at Cummins and its latest results to see what they say about the company's strength moving forward.

There's no place like home for CumminsOverall, Cummins' results were better than most of those following the stock had expected. Revenue rose by 4% to $3.02 billion, doubling the 2% growth rate in the consensus forecast among analysts. Net income rose a fairly modest 5.6% to $471 million, and that worked out to earnings of $2.63 per share, higher than the $2.55 per share that investors had expected to see.

Drilling down on Cummins' business, though, the trend toward domestic success continued for the company. Revenue from North America rose by 12%, with strong demand in on-highway markets and distributor acquisitions driving the gains. Yet in its international market segment, Cummins saw sales drop 6%, and the company named Brazil as its poorest market because of weak economic conditions within Latin America's most important economy.

Most of Cummins' major business units had tepid performance during the quarter. The key engine segment saw sales gains of 2%, and although operating earnings rose by nearly 10%, higher sales of truck and bus engines in North America were held back by poor demand throughout global industrial markets. Once again, Cummins' component business was its best performer, with 9% top-line growth translating to a nearly 21% rise in operating income. There, Europe and China also contributed to solid performance in North America, with only Brazil holding back the business unit. Yet in the power generation segment, operating income fell slightly on just a 1% gain in sales, and the distribution segment saw a revenue decline once you take out the impact of acquisitions during the quarter.

CEO Tom Linebarger tried to accentuate the positive in Cummins' results. "We delivered strong results," Linebarger said, "despite challenging economic conditions in a number of international markets, and we increased cash returned to shareholders." Linebarger pointed to Cummins' success in cutting costs and making its manufacturing and supply chain operations as efficient as possible, and those moves have had a positive impact on earnings.

What's next for Cummins?Once again, though, any Cummins investors who wanted to see the company boost its projections for the full year were disappointed. Cummins once again reiterated its guidance for sales growth of between 2% and 4% this year, along with pre-tax operating margins of between 13.5% and 14%.

Moreover, in its eyes, Cummins has already demonstrated its long-term belief in the health of its business. Earlier this month, Cummins boosted its quarterly dividend by 25% to $0.975 per share, and when you add share repurchases into the mix, Linebarger noted that "we returned $517 million to shareholders in the form of dividends and share repurchases in the second quarter." Cummins' financial statement actually suggests that this figure is low, with its cash-flow statement pegging repurchases alone at $514 million and adding another $280 million from dividend payments on common stock.

Cummins investors celebrated the news, sending the stock soaring by nearly 5% in the first 45 minutes of pre-market trading following the announcement. With the company demonstrating so much strength in its home North American market, Cummins appears well-positioned to outlast tough conditions elsewhere. Moreover, as its engine technology becomes more vital for transportation customers seeking cost savings, Cummins could well see boosts in demand even before the global economy starts to recover.

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

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