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Analyst Blog

On Jun 21, we have downgraded Cummins Inc. (CMI - Analyst Report) to Underperform from Neutral based on the weaknesses in mining, oil & gas, and in the power generation markets. The weakness may adversely affect the results of the company. In addition, the company reported a dismal first-quarter 2013 performance.

Why the Downgrade?

On Apr 30, Cummins posted a sharp 39.5% fall in earnings to $1.44 per share in the first quarter of 2013 from $2.38 in the same quarter of 2012 (all excluding special items). Earnings also missed the Zacks Consensus Estimate of $1.86. Lower earnings were attributable to weak demand in the company’s most major geographies and end markets.

Revenues in the quarter dipped 12% to $3.9 billion, which was marginally lower than the Zacks Consensus Estimate of $4.0 billion. Revenues in North America dropped 15%, while international revenues decreased 10% during the quarter.

Following the release of the first quarter results, the Zacks Consensus Estimate for 2013 decreased 10.4% to $7.84 per share. The Zacks Consensus Estimate for 2014 dropped 6.2% to $9.59 per share. Due to the downward estimate revisions, Cummins retains a Zacks Rank #5 (Strong Sell).

Cause for Concern

We are concerned about the weak construction market as it adversely affects Cummins’ heavy- and medium-duty trucks sales. The company's heavy- and medium-duty trucks constitute 53% of its portfolio, of which 47% is based in the U.S.

In addition, weaknesses in mining, oil and gas and power generation markets are challenging for the Cummins’ Engine segment. Based on these, Cummins anticipates revenues to be flat to down 5% in full year 2013.

Other Stocks to Consider

Some other stocks that are also performing well in the broader industry where Cummins operates include Lear Corp. (LEA - Snapshot Report), Magna International, Inc. (MGA - Analyst Report) and Visteon Corp. (VC - Snapshot Report). All these companies carry a Zacks Rank #1 (Strong Buy).

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