will cummins inc. stock make a comeback in 2016?
TRANSCRIPT
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Will Cummins Inc. Stock Make a Comeback in 2016?
Source: Cummins
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2015: A horrific year for Cummins
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Decelerating growth in Cummins’ top and bottom lines played a key role in
driving its shares lower in 2015
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No growth in revenue and net income
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The weak link: engines
SegmentSales (in billions)
Nine months ended Sept. 27, 2015
Nine months ended Sept. 28, 2014
Engine $7.92 $8.12
Distribution $4.52 $3.48
Components $3.94 $3.8
Power Generation $2.1 $2.1
Higher sales in two of its business segments couldn’t offset the weakness in Cummins’ largest segment, engines
Data source: Company financials. Chart by author
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So why did Cummins’ engine sales fall in 2015?
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Several headwinds are to blamePlunging oil prices, which hurt demand for off-
highway enginesPersistent weakness in key international markets
China and BrazilLower demand for high-horsepower engines which
contribute nearly 12% to Cummins’ engines revenueCurrency fluctuations: a stronger dollar means lower
international revenues when converted
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Unfortunately, things aren’t looking any better for 2016 as business conditions appear to have weakened further in recent months
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Challenges aplentyOil could remain under pressure as supply
exceeds demand and OPEC continues to produce at near-maximum capacity
Growth in China and Brazil is projected to deteriorate in 2016
The North American trucking market is slowing down
Dollar remains strong
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Grim outlookCummins slashed its 2015 outlook in Q3,
projecting an operating margin of 12.75%-13% on flat to 2% lower revenue, down from 13.5%-14% on 2%-4% growth in revenue projected earlier.
The company also announced aggressive restructuring including 2,000 layoffs, indicating greater pain ahead.
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It’s a risky bet
Cummins looks cheap at 9.6 times trailing earnings, but a forward P/E of 10.8 suggests lower earnings in the near future. With analysts projecting Cummins’ earnings to drop nearly 8% next year, 2016 will likely be another challenging year for the stock.
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