Why Is Cummins (CMI) Down 6% Since Last Earnings Report?

It has been about a month since the last earnings report for Cummins (CMI). Shares have lost about 6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cummins due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Cummins Q4 Earnings Surpass Estimates, Down Y/Y

Cummins reported earnings of $2.56 per share in fourth-quarter 2019, surpassing the Zacks Consensus Estimate of $2.42. Higher-than-expected contribution from the Components segment led to the outperformance. Segmental EBITDA (including restricting costs) came in at $189 million, topping the consensus mark of $181 million.

The bottom line, however, declined from earnings of $3.63 a share recorded in fourth-quarter 2018. In the reported quarter, net income attributable to the company was $300 million compared with $579 million in the prior-year period.

Its revenues declined 8.9% year over year to $5.57 billion in the reported quarter. However, revenues beat the Zacks Consensus Estimate of $5.33 billion.

Earnings before interest, taxes, depreciation and amortization (EBITDA) declined to $563 million (10.1% of sales) from $682 million (11.2% of sales) recorded in the prior-year quarter.

Segmental Performance

Sales for the Engine segment declined 15.3% year over year to $2,284 million. The segment’s EBITDA (excluding restricting actions) declined to $277 million (12.1% of sales) from $393 million (14.6% of sales) a year ago. Decline in global demand in truck and construction markets resulted in lower on-and off-highway revenues.

Sales for the Distribution segment totaled $2,038 million, down from $2,050 million recorded in the year-ago period. While revenues from North America remained unchanged year over year, international sales declined 1%. The segment’s EBITDA rose to $164 million (8% of sales) from $140 million (6.8% of sales) a year ago.

Sales for the Components segment declined 12% from the prior-year quarter to $1,557 million. The segment’s EBITDA was $209 million (13.4% of sales) compared with the year-ago quarter figure of $278 million (15.7% of sales). Sales in North America and International markets declined 13% and 11% year over year, respectively.

Sales for the Power Systems segment declined 12% from the year-ago quarter to $1,054 million. The segment’s EBITDA declined to $55 million (5.2% of sales) in fourth-quarter 2019 from $123 million (10.3% of sales) in the year-ago period. In addition to lower revenues, the decline in EBITDA is also attributed to a $15-million charge related to a planned exit of a business in Africa.

Sales for the New Power segment were $18 million. The segment recorded EBITDA loss of $50 million.

Financial Position

Cummins’ cash and cash equivalents were $1,129 million as of Dec 31, 2019, down from $1.3 billion in the corresponding period of 2018. Long-term debt totaled $1,576 million. Its debt-to-capital ratio stands at 15.6%.

Outlook

For 2020, Cummins now projects revenue decline of 8-12%. The bleak guidance is attributed to lower truck production in North America, India, Brazil, China, India and Europe. Decline in demand in off-highway markets — including construction and mining markets — is likely to limit revenues. EBITDA is now expected to be 14.2-15.2% of sales. Notably, the company anticipates to return 75% of operating cash flow to its shareholders in the form of dividends and share repurchases.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -22.24% due to these changes.

VGM Scores

Currently, Cummins has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Cummins has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.