Cummins Makes the Most of a Tough Truck Market

Engine manufacturer Cummins (NYSE: CMI) relies on strength in the trucking market to boost its sales, and lately, the company hasn't gotten much help on that front. Tough macroeconomic conditions across the globe have put a crimp in capital spending plans from many customers, and many of the other markets Cummins serves with its engines have also felt the pain of falling commodity prices and poor conditions. Coming into Thursday's fourth-quarter financial report, Cummins investors were prepared to see substantial drops in sales, and the company wasn't able to entirely avoid that. However, Cummins did manage to fare better on both revenue and net income than most had feared, and investors can count on the engine maker working hard to keep fighting against difficult markets in 2017.

Let's look more closely at Cummins to see how it did and what it sees ahead in the coming year.

Image source: Cummins.

Cummins cushions the blow from downward demand pressure

Cummins' fourth-quarter results again made it clear that the global economy simply isn't firing on all cylinders right now, but they also showed the company's willingness to fight back. Sales were down 6% from year-ago levels to $4.50 billion, but even that figure was far better than the consensus forecast for just $4.34 billion in sales. However, adjusted net income came in at $378 million, up 6% from 2015's fourth quarter, and that produced adjusted earnings of $2.25 per share. That was $0.26 better than most investors were expecting to see from the engine specialist.

Looking more closely at the numbers, Cummins again reported the greatest difficulty close to home. North American revenue plunged 13% from year-ago figures, while international sales were up 6%. The company pointed to lower commercial truck production in its home territory as causing weakness in that region, and industrial engines and power generation equipment saw poorer demand worldwide. However, the Chinese economy was relatively strong, and it was the primary contributor to Cummins' performance abroad.

All four primary segments at Cummins saw sales declines. The engine segment suffered a 6% hit to revenue, coming in at $2 billion, as commercial truck weakness more than offset increases in off-highway sales. The distribution segment saw its top line drop 2% to $1.7 billion despite five percentage points of upward pressure from acquisitions during the year, as a strong dollar and weak sales in the off-highway market weighed on the unit. Component sales were down 5% as North American weakness outweighed Chinese strength, and the power systems segment suffered a 5% drop in revenue as well due to lower demand.

However, most of Cummins' segments salvaged bottom-line gains. The engine segment saw pre-tax earnings climb by more than a fifth, and double-digit percentage gains also benefits the distribution and power systems segments. Only the components division suffered a decline, with pre-tax profit falling 20% to knock it from its previous status as the top money-making segment for Cummins.

What's ahead for Cummins in 2017?

CEO Tom Linebarger was pleased with how the company held up. "Despite weak conditions in a number of our largest markets," Linebarger said, "Cummins delivered fourth quarter results that were a little better than expected due to our strong market share in on-highway markets in North America and the benefits of our cost reduction work." The CEO also pointed to the success of Cummins' restructuring actions to set the stage for better performance when industry conditions improve.

Nevertheless, it's going to take time for the company to see any large-scale turnaround in the industries it serves. In its outlook for 2017, Cummins projected that its full-year revenue would come in flat to down 5% from 2016 levels, and pre-tax income will likely be between 11% and 11.5% of sales. In particular, Cummins sees tough conditions persisting in the first quarter, and just about the only bright spot in the forecast was that the company expects the current quarter to be the low point for the year.

Cummins investors were glad to see that the company did better than expected, and the stock climbed more than 3% in pre-market trading following the announcement. Long-term shareholders can only hope that the actions Cummins has taken will serve it well when the industry starts to recover in earnest. Until then, investors should expect continuing sluggish conditions for the business.

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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.