Analysts Redline Cummins

By any reasonable standard, Cummins (NYSE:CMI) had a great third quarter. Then again, things have not necessarily been "reasonable" regarding Cummins for some time. Analysts dramatically ratcheted up expectations (and price targets) in the wake of the second quarter, and Cummins has become something of a darling among the industrials. When a cyclical stock (even a high-quality one) is trading at a forward PE of 14 and a trailing EV/EBITDA of 15, expectations are definitely running hot and any disappointment will be a blow to the stock.

Expectations Aside
Leaving aside the analyst community's expectations, Cummins continued a strong recovery from the depths of the recession. Revenue was up 34% to over $3.4 billion, led by strength in the medium and light duty engine segments. Overall engine revenue rose 44%, even with some pronounced weakness in heavy-duty engines. Power generation and components were both strong (up 44% and 30% respectively), and accounted for a little less than half of total revenue. Profitability did not meet analyst expectations, but is certainly getting better. Reported EBIT jumped more than 150%, as both engines and power delivered double-digit margins. (For more, see The Bottom Line On Margins.)

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