Cummins Looks to Restart Its Growth Engines

By Dan

Image: Cummins.

Historically, Cummins has been a big driver of innovation in just about every industry that uses engines to power their products. With a slate of businesses that include power generation, emissions-related components, and an extensive distribution network to get needed parts and components to customers as efficiently as possible, Cummins has built itself a strong reputation for quality. Yet the company remains exposed to cyclical movements in the industry economy, and Cummins has struggled to find traction as demand from key customer markets has fallen. Cummins is slated to release its third-quarter financial report on Tuesday, and investors would like to see signs that despite its falling share price, the company can survive the current cyclical downturn and thrive in the long run. Let's look more closely at how Cummins is likely to fare and what's ahead for the engine maker going forward.

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Can Cummins earnings build momentum? In recent months, investors have remained nervous about Cummins earnings prospects, especially over the long run. Although the decline in projections for the third quarter have fallen by only about 1%, a 6% cut to full-year 2016 expectations reflects the ongoing uncertainty about how quickly the industrial economy can turn around. The stock has mirrored that nervousness, with shares falling 11% since late July.

Cummins' second-quarter results revealed how different parts of the engine-maker's business are seeing widely disparate industry conditions. Overall, Cummins' revenue rose 4%, with the North American business leading the way with double-digit percentage sales growth. Yet internationally, Cummins has run into substantial problems, with sales falling due in large part to weakness in Brazil. Component sales have been the star among Cummins' segments, but the vital engine segment only saw a 2% rise in revenue, again with poor global demand holding the company back from bigger gains in its home North American market.

Still, Cummins is facing potential challenges in just about every part of its business. Some analysts believe that the heavy-duty trucking segment could be peaking in North America, and that could remove what has been a key source of support for Cummins. Poor conditions in the agricultural and mining industries have cut demand for products for off-highway use. Moreover, several current customers have sought to bring engine production in-house, with PACCAR being just one example of the trend toward vertical integration. PACCAR is planning to bring one of its key engine products to North America within its Kenworth and Peterbilt trucks, and in turn, it will make an existing award-winning engine more broadly available worldwide. If major customers take their business away from Cummins, it will make it even more important for the company to stay on the cutting edge with innovative new products that customers simply can't replicate on their own.

One area where Cummins continues to remain strong is in natural-gas engine technology. The companies Cummins Westport joint venture announced in early October that it would offer a version of its ISL G natural gas engine that has nearly no emissions of nitrogen oxide gases, which are a key pollutant that contributes to poor air quality in urban areas. Even though plunging oil prices have removed some of the immediate benefits of having engine customers shift toward natural-gas-burning engines, Cummins nevertheless has made itself a leader in alternative-fuel technology, and that could serve the company well if oil prices start to spike upward again even as plentiful natural gas remains available.

In the Cummins earnings report, investors need to see signs that corporate managers are on top of the increasingly troubling situation in some of the company's key markets and have a strategy to avoid major disruptions going forward. Without a plan in place, it could be hard for shareholders to have the confidence they need in order to bring the stock's long decline to a halt.

The article Cummins Looks to Restart Its Growth Engines originally appeared on

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