Engine manufacturer Cummins (NYSE:CMI) beat Wall Street’s revenue expectations in Q3 CY2024, but sales were flat year on year at $8.46 billion. Its GAAP profit of $5.86 per share was also 21% above analysts’ consensus estimates.

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Company Overview

With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE:CMI) offers engines and power systems.

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Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Cummins’s 7.2% annualized revenue growth over the last five years was mediocre. This shows it couldn’t expand in any major way, a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Cummins’s annualized revenue growth of 14.3% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Components and Engine , which are 31.9% and 34.3% of revenue. Over the last two years, Cummins’s Components revenue (axles, brakes, drivelines) averaged 27.6% year-on-year growth while its Engine revenue (diesel and gas-powered engines) averaged 4.8% growth.

This quarter, Cummins’s $8.46 billion of revenue was flat year on year but beat Wall Street’s estimates by 1.8%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and illustrates the market thinks its products and services will face some demand challenges.

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Operating Margin

Cummins has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.5%, higher than the broader industrials sector.

Looking at the trend in its profitability, Cummins’s annual operating margin decreased by 4.9 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Cummins become more profitable in the future.

This quarter, Cummins generated an operating profit margin of 12.4%, up 1.1 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

Analyzing revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Cummins, its EPS declined by 1.2% annually over the last five years while its revenue grew by 7.2%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Cummins’s earnings can give us a better understanding of its performance. As we mentioned earlier, Cummins’s operating margin improved this quarter but declined by 4.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

In Q3, Cummins reported EPS at $5.86, up from $4.59 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Cummins’s full-year EPS of $15.14 to grow by 40.3%.

Key Takeaways from Cummins’s Q3 Results

We were impressed by how significantly Cummins blew past analysts’ EPS and EBITDA expectations this quarter. We were also excited that its revenue outperformed Wall Street’s estimates due to strong performance in its Engine division. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 4.4% to $340 immediately after reporting.

Sure, Cummins had a solid quarter, but if we look at the bigger picture, is this stock a buy? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.