When engine and powertrain manufacturer Cummins (CMI 0.25%), reported its first-quarter 2019 results, the company was relatively optimistic about 2019. It gave overall revenue guidance of flat to up 4%, with the same mid-range estimates for each of its four main segments: engine, distribution, components, and power systems.
But those estimates have trended down throughout the year, with fourth-quarter revenue guidance now having been revised to down 13% versus 2018. The company recently addressed the market slowdown in its Analyst Day presentation. Let's explore the current dynamics of the market, and how the company is preparing for it.
Image source: Getty Images.
Markets are trending down
Cummins' engine segment is its largest division. The table below shows how the company's 2019 estimates of the key on-highway engine markets have been trending.
| Key Market | Q3 2019 (units estimate) | Q2 2019 (units estimate) | Q1 2019 (units estimate) |
|---|---|---|---|
| Heavy-duty trucks, North America | 299,000 | 300,000 | 300,000 |
| Medium-duty trucks, North America | 138,000 | 140,000 | 140,000 |
| Heavy- and medium-duty trucks, China | 1,234,000 | 1,193,000 | 1,193,000 |
| Heavy- and medium-duty trucks, India | 330,000 | 369,000 | 421,000 |
| Heavy- and medium-duty trucks, Brazil | 106,000 | 108,000 | 120,000 |
Data source: Cummins.
North American sales results have followed these general trends. Cummins has 35% of the North American heavy-duty truck market and 78% of the medium-duty market as of the most recent quarter, so it's an important region for an important business segment.
| Q3 2019 | Q2 2019 | Q1 2019 | |
|---|---|---|---|
| North America sales (YOY) | Flat | Up 7% | Up 13% |
Data source: Cummins. YOY = year over year.
Weathering the storm
On Nov. 21, Cummins shared its plan with investors to successfully navigate the cyclicality in its business. CFO Mark Smith reassured investors that the company has the experience to weather downturns:
Cummins has the financial strength to keep investing through the cycle and return cash to shareholders. We are taking steps to lower our cost base, while continuing to invest in the new products and services that will position the Company for a stronger future, when markets recover.
The chart below shows how the company has expanded profits and cash flow since the last recession.
| Metric | 2010-2019 | 2000-2009 |
|---|---|---|
| EBITDA | $27 billion | $9 billion |
| Operating cash flow | $20 billion | $6 billion |
| Revenue growth* | 7.6% | N/A |
Data source: Cummins Investor Day presentation. *Compound annual growth rate.
Embracing the cycle
At its Analyst Day, the company announced plans for lowering costs by $250 million to $300 million in 2020, through reducing headcount by 2,000 employees, including some who have accepted an early retirement package. It expects to complete this by the end of first quarter 2020.
After seeing demand in several key markets deteriorate during the second half of 2019, the company went into the mode of managing the cycle. In addition to showing plans to grow its market share, the company's Investor Day presentation noted that it will "embrace cycles and improve base profitability."
The long-term view
Cummins investors should feel comfortable with an experienced management team that is preparing head-on for a slowdown in its markets. Besides tightening up the business and costs, the company has shared its plans to continue growing coming out of the downturn portion of the cycle.
It is launching a new power business segment that will include electrification. This is not a shift away from diesel, but rather an acknowledgment that as markets slowly move toward electrification, the company wants to be a leader there as well.
Management also is showing confidence by recently announcing a $2 billion share repurchase plan. This is a commitment that should encourage shareholders of this blue chip company to also take the long-term view.
