Shares of Cummins, Inc. (CMI) struggled on Thursday – with its stock dropping by 4.2% from Wednesday’s close.
What caused the sudden dip?
The company’s earnings for the fourth quarter certainly didn’t trigger the selloff, considering that Cummins beat Q4 expectations. Earnings per share (EPS) reached $2.56 – representing a 32% jump over the same quarter last year.
The drop didn’t coincide with a broader market decline, either. The three major indices experienced significant gains of 1% or more.
So something just doesn’t add up…
That is, until you check out the company’s revenue expectations. Indeed, the company gave pessimistic guidance for 2015.
According to Cummins, weak demand in international markets, along with a strong dollar, portends a year in which continued growth will be harder to attain. Especially for a company like Cummins, which derives more than half of its revenue from overseas markets.
So the company now sees full-year revenue between $19.6 billion and $20 billion. That represents a decrease of 2% on the low end and a whopping 13% on the high end.
Here’s why I’m not buying it…
Debunking the “Stronger Dollar” Problem
Dozens of American companies have warned that a stronger dollar will significantly reduce revenue and profits. And it’s true that a stronger dollar will impact Cummins.
But the devastation is being exaggerated.
While it’s generally understood that a 10% increase in the value of the dollar will reduce S&P 500 earnings by $3, it’s important to remember that EPS for the broad market index is still expected to climb nearly 3% this year – despite the stronger dollar!
In other words, the siren song of the strong dollar is a well-played excuse for lackluster corporate results.
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Management may need to eat its words, in fact, because Cummins had a solid quarter with the higher dollar…
Besides, the dollar has been gaining ground against most of the world’s major currencies since at least July 2014. Yet it failed to impact Cummins’ Q4 2014 results in any remarkable way.
For the fourth quarter, the company reported total revenue of $5.09 billion, a 10.8% jump over the $4.59 billion reported in the same period a year ago.
Net income for the quarter also saw significant improvement, climbing to $465 million. That’s an increase of 28.4% over the $362 million reported in Q4 2013.
And the company’s operating income increased, rising to $581 million from $553 million a year ago.
Adjusted earnings before interest and taxes (EBIT) hit $661 million, up from the $566 million reported in the same quarter last year.
Ultimately, Cummins’ future is still promising. Here’s the main reason I’m still bullish on the company…
Just Blowing Steam
FTR Transportation Intelligence has released its preliminary data showing that January 2015 North American Class 8 truck orders currently sit at 35,060 units.
While this represents a modest decline from the blistering pace of Q4 2014, it remains the strongest level of activity for any month of January since 2006, and represents a 2% year-over-year gain.
This underscores the confidence of motor carriers, who – after seeing several quarters of high freight demand – are just now starting to add capacity.
And with Cummins’ new G Series platform, the company stands to take advantage of this capacity by providing an adaptive architecture that allows carriers to deliver higher power with increased efficiency – something every trucking firm craves.
Don’t let Cummins’ guidance blind you to the opportunity here. Use Thursday’s decline as an excuse to average into the engine maker.