Cummins is the latest company to report its Q3 numbers, and they’re good. It saw an 18 percent increase in net earnings on a 14 percent increase in sales, compared to the same period in 2005. Sales for the quarter were $2.81 / €2.2 /£1.47 billion, compared to $2.47 / €1.94 / £1.29 billion for the third quarter of 2005. Net income of $171 / €134 / £89.62 million, or $3.37 / €2.64 / £1.77 a share, was up from $145 / €113.69 / £75.99 million, or $2.90 / €2.27 / £1.52 a share, in the same period last year.
Although Cummins does point to a downturn in its core NAFTA market next year, it alludes to its increasing interest in Emerging Market business as being a safety net. It recently struck a JV deal with Beiqi Foton – to produce 2.8- and 3.8-litre engines for the light commercial vehicle markets in China beginning in 2008. Beiqi Foton is DaimlerChrysler’s partner in China – or will be if the deal is finalized – and DaimlerChrysler is the first major customer for Cummins’ light-duty diesel engines due to emerge from its Columbus Engine Plant by the end of the decade. Think Dodge Ram. Cummins also has a growing relationship with Ashok Leyland - and Cummins India recently posted a 66 per cent hike in net Q2 profits. This brokerage note suggests that a relationship with Ashok is no bad thing at present.
Much has been written about the dire prospects for the US Tier 1 engine builders in a global, verticalised market. Both Caterpillar and Cummins must look at the US Class 8 market and rather wish they had something else to do.
Which they do: Caterpillar is going to continue making engines anyway – off-highway, static gen sets – whatever – and so its on-highway business is essentially incremental. Cummins is far less diversified, but has obviously seen a future that is more light and medium rather than heavy duty in its core markets. It also has a developing reputation courtesy of its XPI technology in Europe. Tier 1 goes to specialist Tier 2?
It would be easy to write off a Tier 1 engine builder as being irrelevant to the new global truck business. But that would be premature. Whist our reservations about China remain – and grow as each day passes – we think that the new directions being explored by Cummins are both sensible and – given the predicted upsurge in light duty diesel demand in NAFTA – potentially rather profitable.