Cummins Keeps Its Earnings Engines Running -- for Now

Source: Cummins.

Engines make the world go, and Cummins is a leader in designing and manufacturing the engines that power the heavy equipment the transportation industry relies on to move goods from place to place. Coming into Thursday morning's fourth-quarter earnings report, though, investors had some concerns about whether the declining health of the energy sector might take some of the wind out of Cummins' sails. The company posted solid growth for the quarter, but it remains to be seen if that growth can be sustained in 2015 and beyond. Let's look at the report to see what might lie ahead for the engine maker.

Cummins finished 2014 in high gear

Cummins touted record results for full-year 2014, with the company's fourth quarter largely topping what investors had expected. Revenue climbed 11% to $5.09 billion, well above the $5.02 billion consensus projection among those following the stock. Earnings per share came in at $2.56 after adjusting for costs related to a plant closing and other actions within its power-generation business, beating expectations by a nickel per share.

Cummins' various divisions showed areas of both strength and weakness. On the positive side, sales in the key engine business climbed by 11%, and the distribution segment saw the most impressive gains, with revenue rising 58% due in large part to recent acquisitions. Sales of components also grew by a solid 16%. Only the power-generation segment lagged behind, with essentially flat revenue compared to the year-ago quarter. Segment operating income followed the same pattern, with power-generation pre-tax income down by more than half while the bottom line improved in engines, distribution, and components.

Throughout the company, Cummins reflected the strength of the North American economy, with gains from on-highway markets in its home market largely offsetting weakness in some other areas. For instance, the engine segment suffered setbacks in Brazil, China, and Europe, as economic activity in those markets remained more sluggish than in the past.

"Supertruck" tractor-trailer co-developed by Cummins and Peterbilt. Source: Cummins.

CEO Tom Linebarger emphasized the magnitude of Cummins' accomplishments, saying in the press release, "We reported record revenues in 2014 despite weak economic conditions in several of our most important international markets." Linebarger also pointed to new product launches in China he hopes will help Cummins take advantage of the massive opportunity there.

Why 2015 will be tougher for Cummins

Despite the positive sentiments, Cummins clearly expects a tough 2015. For full year 2014, Cummins' sales grew by 11%. But its guidance for 2015 calls for revenue to climb by just 2% to 4%, which could put a cap on further gains for the stock.

Still, Cummins expects to do everything possible to boost its bottom-line results. The engine maker expects pre-tax earnings to come in between 13.5% and 14% of total revenue in 2015. Given that Cummins only produced a pre-tax margin of 12.7% in 2014, the resulting boost in profitability could help produce substantial gains in net income even if sales remain sluggish.

Source: Cummins.

Nevertheless, long-term investors will need some time to grow accustomed to the slower growth projections. Coming into the report, investors expected Cummins to keep up its growth pace into 2015, with anticipated sales growth of almost 10% hoped to power earnings higher by close to 20%.

Right now, Cummins' biggest wild card is the impact of the plunge in energy prices. On one hand, cheaper operating costs for transportation companies could drive capital-equipment purchases that would bolster Cummins' results. Yet Cummins has also been a pioneer in natural-gas engine technology, and cheap oil could give customers less incentive to switch from conventional engines. Moreover, energy companies will clearly reduce their capital expenditures, and that could drag on Cummins' growth as well.

Overall, unless conditions in the global economy improve more quickly than most people anticipate, Cummins might well have to deal with cyclical headwinds in 2015. The company's ability to sustain its earnings during a potential tough period will say a lot about whether Cummins deserves the long-term confidence of its investors.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Cummins. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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