The recent reopening of the world’s second-biggest economy will be a boost to Cummins Inc.’s business in 2023. President and CEO Jennifer Rumsey and CFO Mark Smith just can’t say yet how much.
China accounted for 13% of Cummins sales in 2021 (up from less than 10% two years earlier) and is the home to a handful of key joint ventures making diesel engines. But authorities’ stringent efforts in the second half of 2022 to contain COVID-19 put a big dent in demand for Cummins products there. Rumsey said her team is paying close attention to the economy’s rebound from lockdowns and is at this point counting only on a slow recovery in 2023.
But there is potential for upside in that forecast.
“As I sit here today and say, ‘What could be the one thing that could move, that could change our guidance most clearly?’ […] It would be China,” Smith told analysts on a conference call with analysts after Cummins reported fourth-quarter results. “We don’t have visibility. People are more enthusiastic, but the activity hasn’t yet materially picked up.”
Indianapolis-based Cummins posted a fourth-quarter net profit of $631 million on sales of nearly $7.8 billion, numbers that were up 60% and 33%, respectively, from the last three months of 2021. Excluding the acquisition of Meritor, which was wrapped up in August, sales climbed 13% year over year and EBITDA surged 51% to nearly $1.1 billion as the company raised prices to absorb input cost increases that started in 2021.
The company’s power systems division, which includes generators and alternators, was a standout during the quarter, growing its margin more than 5 points from late 2021 as sales climbed 22% to more than $1.3 billion. Its budding electrification business rang up revenues of $79 million during the quarter versus $34 million a year earlier but booked a bigger loss of $81 million. Smith said that unit is in line to get between $100 million and $125 million in capital spending this year as it work toward breaking even on an EBITDA level by 2027.
Looking ahead, capex across Cummins’ business is projected to grow to a range of $1.2 billion to $1.3 billion from $916 million last year and $734 million in 2021. That plan is part of a forecast for total revenue growth of between 12% and 17% and an EBITDA margin between 14.5% and 15.2%, down from about 16% in Q4. Meritor’s EBITDA margin is forecast to be 10.3% to 11%, up from about 5% in the fourth quarter as the two companies continue to integrate their operations.
Shares of Cummins (Ticker: CMI) fell about 2% to $250.90 Feb. 6 on above-average volume. Over the past six months, they are still up about 15%, a move that has grown the company’s market capitalization to about $35 billion.
