Cummins Downgraded to Neutral

We have downgraded our recommendation on Cummins Inc. ( CMI - Analyst Report ) to Neutral from Outperform. Headquartered in Columbus, Indiana, Cummins is a leading worldwide designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems.

Cummins primarily sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. The company boosts an impressive clientele including leading manufacturers like Chrysler LLC, Daimler AG ( DDAIF ) , Volvo AB ( VOLVY ) , PACCAR Inc. ( PCAR - Analyst Report ) , Navistar International Corporation ( NAV - Analyst Report ) , CNH Global N.V. "> ( CNH - Snapshot Report ) , Komatsu, Scania AB ( ) , Ford Motor Co. ( F - Analyst Report ) and Volkswagen.

The company released its third quarter earnings on October 25, 2011. Adjusted income increased to $2.20 per share from $1.33 in the year-ago quarter. Revenues rose 36% to $4.63 billion, driven by strong growth in the company’s key markets, including mining, oil & gas, and North American and Brazilian on-highway as well as favorable construction demand in Asia.

The macroeconomic environment in the U.S. is taking its toll on Cummins. The company’s heavy- and medium-duty trucks (which constitute 53% of the company’s portfolio; mostly U.S.-based) have been hit badly of late, as have the construction segment.

In addition, it is also expected that the governments’ plans to reduce inflation in India and China as well as strengthening U.S. dollar would weaken the near-term demand for Cummins products. As a result, Cummins reduced its revenue guidance to $17.5 billion–$18 billion for full-year 2011.

Considering all these, the shares of Cummins are also maintaining a Zacks #3 Rank which translates into a Hold rating over the short term.