On Tuesday, August 2, Cummins (CMI) announced its second quarter 2022 financial results. Despite an uncertain global outlook for the specialty industrial machinery sector, the company stood by its Fiscal Year 2022 revenue guidance, beating analysts on diluted earnings per share (EPS) and revenue.
Also, demand in North America and overseas continues to gain momentum, while the impact of rising input costs has eased somewhat thanks to the implementation of effective pricing measures. I am bullish on Cummins as the stock’s value could potentially be supported by higher sales resulting from an expected increase in the size of the global industrial machinery market.
What is Special about Cummins?
Cummins Inc is a leading global designer and manufacturer of a variety of power solutions, including diesel, natural gas, electric, and hybrid engines, as well as distribution systems and related components. Its engines are known to be reliable, powerful, long-lasting, and capable of handling very heavy commercial work.
The company sells its products to OEMs (Original Equipment Manufacturers), distributors, dealers, and other customers active in the heavy/medium/light industrial and agricultural machine markets.
Cummins Beat Earnings Expectations Despite an Uncertain Global Growth Outlook
In the second quarter of 2022, Cummins reported EPS of $5.36, beating consensus estimates of $4.36. This is a substantial increase compared to the prior year’s quarter of $4.15. The total revenue was around $6.6 billion, which corresponded to an increase of roughly 8% versus the previous year. Furthermore, EBITDA was $1.056 billion, or about 16% of total sales.
Commenting on Cummins’ financial results, Jennifer Rumsey, President and Chief Executive Officer, said that revenue hit a record high while the profitability of operations was solid. She added that the demand for Cummins products was strong across the company’s key markets and regions, except for China due to COVID-19 restrictions and Russia due to suspension of operations following the war in Ukraine.
“We continue to monitor economic conditions closely and will adjust our operating plans, should the outlook for our core markets weaken,” stated Jennifer Rumsey.
Looking ahead to Fiscal Year 2022, the company expects revenue of $25.94 billion, an increase of 8% year-over-year, versus analysts’ average forecast of $26.02 billion. EBITDA should increase by about 15.5% from the level reported in 2021, according to the company’s expectations.
Cummins shares rallied on Tuesday to a high of approximately $224 per share after the earnings release but have since pulled back to $220 as of this writing. Nevertheless, investors appear to have liked what they saw, as the share price is still higher than it was prior to the report.
Demand for Cummins Will be Led by Agriculture and Construction
Agriculture and construction will fuel the projected expansion of the global industrial machinery market in the coming years, which will likely also support the demand for Cummins products. According to ResearchAndMarkets, the global industrial machinery market (valued at $565.6 billion in 2020) is set to grow 5% per year over the next 5 years to reach $794 billion by 2027.
The operating environment is not easy as it holds the presence of fierce competitors such as Caterpillar (CAT) and CNH Industrial N.V. (CNHI). Elevated inflation, higher borrowing costs due to the Federal Reserve’s hawkish stance, and persistent supply chain bottlenecks around the world will not make things any easier for Cummins or any other operator.
Nevertheless, the company has proven that its operations can weather these severe headwinds and still grow sales and earnings, as it relies on a portfolio that appears well positioned to meet the required demand.
In addition, the ongoing recovery in China after the recent wave of COVID-19 will benefit the company’s profitability, as China, the world’s second-largest economy, has an immense and fast-growing market. Both its central bank and government are implementing specific policies to promote agricultural mechanization, urbanization, and infrastructure modernization, fueling the demand for Cummins products.
Does Cummins Pay a Dividend?
Cummins offers a dividend yield of 2.66%, which is higher than the average sector dividend yield of 1.64%. Furthermore, the company recently raised its quarterly dividend per share to $1.57, an 8.3% increase from the previous payment.
Moreover, Cummins has a forward PE ratio of 12.24, which indicates that it could be a potential bargain if purchased at these levels. Ideally, this ratio should be no more than 15 for the stock to be considered a potential bargain.
Wall Street’s Take on CMI Stock
In the past three months, eight Wall Street analysts have issued a 12-month price target for CMI. The stock has a Moderate Buy consensus rating based on three Buys and five Holds. The average CMI price target is $229.50, implying 4.40% upside potential.
Final Thoughts – Will Cummins Stock Go Up?
Cummins shareholders could see better returns on their holdings going forward, and not just because of a possible increase in the dividend per share. The share price is expected to improve as the company continues to grow sales and profitability, benefiting from robust demand for its products despite various strong headwinds.
Globally, the industrial machinery industry is expected to expand in the coming years, led by the agricultural and construction segments. In addition, the recovery of the Chinese market after the latest COVID-19 wave will be incredibly helpful, along with the supportive measures from China’s central bank and government.
