Will Cummins Inc. Stock Make a Comeback in 2016?

Source: Cummins

2015: A horrific year for Cummins

Decelerating growth in Cummins’ top and bottom lines played a key role in

driving its shares lower in 2015

No growth in revenue and net income

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

So why did Cummins’ engine sales fall in 2015?

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

Unfortunately, things aren’t looking any better for 2016 as business conditions appear to have weakened further in recent months

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

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.

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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