Cummins Leaders: No Good View into China Demand Recovery

Feb. 6, 2023

Excluding its acquired Meritor business, Q4 sales rose 13% from late 2021.

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.

About the Author

Geert De Lombaerde | Senior Editor

A native of Belgium, Geert De Lombaerde has been in business journalism since the mid-1990s and writes about public companies, markets and economic trends for Endeavor Business Media publications, focusing on IndustryWeek, FleetOwner, Oil & Gas Journal, T&D World and Healthcare Innovation. He also curates the twice-monthly Market Moves Strategy newsletter that showcases Endeavor stories on strategy, leadership and investment and contributes to other Market Moves newsletters.

With a degree in journalism from the University of Missouri, he began his reporting career at the Business Courier in Cincinnati in 1997, initially covering retail and the courts before shifting to banking, insurance and investing. He later was managing editor and editor of the Nashville Business Journal before being named editor of the Nashville Post in early 2008. He led a team that helped grow the Post's online traffic more than fivefold before joining Endeavor in September 2021.