This Company Has Swung Into High Gear

What do you make of a company that crushes Street estimates but is punished by Mr. Market? That's what happened to engine maker Cummins (NYS: CMI) . Despite having a great first quarter, its shares shed 4% of their value after the results were declared.

Let's look at the numbers to see whether there's something we should really be concerned about.

Truckin' ahead
Sales in Cummins' largest division, the engine segment, climbed 20% from the year-ago quarter to $2.9 billion. Total revenue from North America surged an impressive 40%. In fact, the strength in the North American market, particularly in the trucking and construction segments, is acting as a savior for most companies in a situation where markets like Europe, China, and Brazil are experiencing a bit of a slowdown.

For instance, most of the 13% sales growth in Caterpillar's (NYS: CAT) largest division, construction industries, came from North America, which helped lift its total first quarter revenue by 23%. And PACCAR (NAS: PCAR) went one step ahead as it reported a 48% rise in its first-quarter revenue, as the U.S. trucking market bounced back splendidly. This was also a factor that contributed to a 20% rise in Navistar International's (NYS: NAV) first-quarter truck segment sales.

These figures, along with the overall industry data, confirm the revival of the U.S. trucking industry. The health of this industry is critical for Cummins, as its engines are widely used in heavy- and medium-duty trucks. More importantly, Cummins derives more than half of its engine division sales from the U.S. market. A strong market here would obviously go a long way in offsetting weaknesses in other parts of the world.

No claims on Cummins
Apart from the strong top-line growth, what I also like about Cummins is the improvement in its gross margins. After remaining within a range of 25%-26% in the past few quarters, it hit 26.8% during the first quarter. An important factor behind this achievement was low warranty costs, which stands out, particularly if we compare the case with peer Navistar.

Incidentally, both companies worked hard to adhere to the EPA emission standards when they launched new engines in 2010.

But while Navistar buckled under the pressure of warranty claims in the first quarter pertaining to problems in its engines developed in 2010, Cummins has faced no such issues. In fact, its warranty costs were at a 15-year low in 2011. This performance reflects strong research and development efforts on the company's part, while the improving margins are indicative of management efficiency.

Cummins is also gaining from its leadership in the heavy natural-gas engines market -- a position it achieved thanks to its partnership with Westport Innovations (NAS: WPRT) . Cummins Westport engines are fast emerging as the hot favorite among trucking companies. Navistar will power its new trucks with these engines, and PACCAR too, will fit a wider range of trucks with the new Cummins Westport heavy-duty ISX12 G engines that Cummins will begin producing next year. As the natural gas revolution gathers steam, Cummins can gain a lot out of it.

The Foolish bottom line
Cummins' solid numbers tell me that investors might just be booking some profits on its shares. The stock is up more than 26% year to date.

Management might not have raised its full-year guidance, but Cummins will land record revenue and profits this year if it meets its current guidance. Add Cummins to your free stock Watchlist to stay updated on all its news and analysis.

At the time thisarticle was published Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services have recommended buying shares of Cummins, Westport Innovations, and PACCAR. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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