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Fitch Ratings Services has raised its Long-term Issuer Default Rating (IDR) and long-term debt ratings on Cummins Inc. (CMI - Analyst Report) to ‘A' from 'A-'. Along with the rating upgrade, Fitch has conferred a stable outlook on the entity.

The rating upgrade was based on the company’s strong operating profile, consistently low leverage, financial flexibility, and improvement in its operating margins. The rating agency also factored in the company’s cyclic end market and its ability to generate positive free cash flow even in the downturn.

The company benefits from its leading positions in the core engine and power generation markets, geographic diversification, global distribution network, and technological capabilities abiding the strict emissions and fuel economy regulations. The updated technologies help the company to meet the changing global emissions standards and rising demand for fuel efficiency. In addition, well funded pension plans provide financial flexibility.

Cummins, in the second quarter of 2012, registered a 2% growth in adjusted earnings per share to $2.45 from $2.41 in the year-ago quarter despite a fall in the adjusted net income to $465 million from $468 million in the corresponding quarter last year. The results surpassed the Zacks Consensus Estimate by 18 cents. The year-over-year rise in earnings per share was attributable to a fall in average shares outstanding to 190.1 million in the quarter from 194.4 million shares in the year-ago quarter.

Total revenues went down 4% year over year to $4.45 billion in the quarter, slightly lower than the Zacks Consensus Estimate of $4.47 billion. The decline was due to weak international markets in Brazil and China.

Cummins faces stiff competition from Caterpillar Inc. (CAT - Analyst Report) and Navistar International Corporation (NAV - Analyst Report). Currently, it retains a Zacks #5 Rank, which translates into a short-term (1 to 3 months) Strong Sell rating.

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