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Morningstar | Cummins Reports Impressive First Quarter Driven by Strong Truck Sales and Infrastructure Spending

Narrow-moat Cummins reported impressive first-quarter EPS of $4.20 that beat consensus of $3.54. Revenue of $6.0 billion was up 7.8% year over year, beating consensus of $5.8 billion. Strong sales of its engines into the North American truck market contributed to this performance. Improved sales to international construction equipment manufacturers, including those in China, were unexpected. Due to improved supply chain operations, management raised EBITDA margin guidance for 2019 from 16.25% to 16.75% up from its previous guidance with a midpoint of 16%. Despite these positive indicators, we maintain our fair value estimate of $159 as adoption of electrified powertrains is likely to negatively impact Cummins in the long term.

Sales in the quarter were mixed across a diverse range of end markets. The class-8 truck market was strong in the past year, driving sales of Cummins' highly popular X15 engine. Despite OEMs' aggressive marketing of their more fuel-efficient 13-liter engines, Cummins was able to increase its market share in North America to 34% from 32% in the first quarter of 2018. Demand for its truck engines in China was hurt by a 2% decline in medium- and heavy-duty trucks offset by an increase in market share, which increased to 11.8% from 11.5%. Indian truck engine sales were disappointing as the truck market declined by 5% while Cummins’ market share declined to 37% from 38%. Indian truck engine demand is anticipated to increase in second-half 2019 ahead of the next generation emission standard, BS VI, in 2020.

Global infrastructure spending helped Cummins on many fronts. Engine sales to construction equipment manufacturers in North America increased 27%. Infrastructure spending in China led to a year-over-year increase in excavator sales of 25% while Cummins’ market share increased to 14.3% from 12.9%. Power generation sales to Indian construction customers are expected to increase 5% to 10% in 2019 due to increased infrastructure investment.

Broad impacts of technology adoption continue to influence many facets of Cummins’ business. Global data center growth helped fuel the sale of its backup generators in the quarter that partially offset a significant slump in power generation sales in oil and gas markets. Overall research and development expenditures were up 13% year over year driven by development of engines compliant with new emission standards in China and India along with investments in electric powertrain technology. During the first quarter, there were several announcements from electric heavy-truck manufacturers (Tesla, Nikola, Xos) indicating customer wins despite their lack of production vehicles. We believe that Cummins will likely need to further ramp up its electrification efforts to mitigate potential market share losses created by these new entrants.