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Cummins Inc. (CMI), Caterpillar Inc. (CAT), Navistar International Corp (NAV): Commercial-Vehicle Industry Outlook Augurs Well for This Stock

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Cummins Sales GuidanceAs a major innovation in its product line, Cummins Inc. (NYSE:CMI) revealed its newly invented QSF3.8 engine at the BAUMA show in Munich.  It has a power output range up to 132 hp to meet specific requirements. Interestingly, after rising about 1.5% the same day (April 16), Cummins continued to fall for 4 consecutive trading-sessions to $106 on April 19, losing about 9%. Currently, the stock is trading around $111.

Recently Cummins Inc. (NYSE:CMI), a global power leader and manufacturer of diesel and natural gas related engines, came up with dismal quarterly earnings and weak 2014 guidance. The stock performance of the company was on the same line. However, not everything is bad for Cummins. In this article, I am going to focus on the economy and the industry growth in the geographies Cummins operates in.

Bad earnings followed by good industry outlook

Cummins Inc. (NYSE:CMI) reported total revenue of $4.3 billion, down 13% compared to the 4Q’11. EBIT was $552 million, down 18% from a level of $677 million a year ago.  Quarterly EPS was down by 30% at $1.95 and yearly EPS dropped 9% at $8.67 from the previous year. International revenues decreased by 15% in 2012 compared to 2011. The company saw a significant sales-drop in Brazil, China and Europe as a result of the weakening economy and the impact of the transition to Euro IV emission standards.

Silver lining

All the major growing economies are coming out of a slowdown. Countries like India, China and Brazil have shown a major upward trend in their manufacturing activities and their GDP forecast are higher than their current level. In 2012, total commercial vehicle sales were about 2.6 million. According to a report by Frost and Sullivan, the expected figure for commercial vehicles in 2013 is 2.8 million, an increase of around 7.6%.

An outlook of the commercial vehicle market

The US market

Of the total sales of Cummins Inc. (NYSE:CMI), 62% comes from the US and Canada region. In this region, Cummins is the market leader with a share of about 39%. This market is set to grow in the year 2013. According to a report by Polk Views, new commercial vehicle registration in the US is forecast to grow by around 8% in the year 2013 over 2012. With 583 thousand new vehicle registrations in 2013, the US market has witnessed about 50% growth over the past four years.

New commercial vehicle registration in the US (figures in thousands):

Cummins Inc. (CMI), Caterpillar Inc. (CAT), Navistar International Corp (NAV): Commercial-Vehicle Industry Outlook Augurs Well for This Stock
2009 2010 2011 2012 2013

Source

Chinese market

The Chinese market accounts for 15% of Cummins’ total sales. Chinese manufacturing data for the latest months was better than the expected. China is showing great signs of recovery as production and orders are picking up.  Purchasing Managers’ Index was 51.7 in March compared with 50.4 in February. A reading above 50 indicates expansion.  Besides, China has seen a decline in the goods transported by rail since 2000 from 69% to 39% (2010), which has increased the potential demand for road-bound freight traffic. Though the majority of the truck manufactures are local players in China, engine providers are multinational companies like Cummins. Cummins operates joint ventures in economies like China and India.

Russian Market

Russia has seen a major loss in its commercial vehicle market during the recession. According to a KPMG report, Russia’s commercial vehicle market collapsed about 50% in 2009. The main characteristic of the Russian market is the dependence of the local demand on exports. With signs of recovery, the Russian market is expected to show a demand surge for commercial vehicles.

Due to the rapid recovery and the growth pattern the commercial vehicle market is showing, the number of units sold in 2015 is expected to be at 33 million, a growth of about 26% over a period of 3 years.

Total world demand for the commercial vehicle, geography-wise, in 2013:

(in 2013) HCV MCV
North America 280,000 230,000
South America 140,000 70,000
China 730,000 270,000
India 159,000 141,000
Russia 94,800 25,200
Europe 240,000 60,000

Data Source: Website; Table- stockriters.com

With its presence and market share in all these economies, I expect Cummins to see sales growth of around 6-7% in the next two to three years.

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