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On Feb 12, we upgraded Cummins Inc. (CMI - Analyst Report) to Neutral based on its opportunities from fuel economy improvements, new emission standards and increased prices. Further, the upgrade was based on the company’s focus on engine division where it invested heavily for capacity expansion and new product launch.

Why the Upgrade?

Despite reporting a 21.9% fall in earnings per share to $2.00 in the fourth quarter of 2012, Cummins’ EPS exceeded the Zacks Consensus Estimate by a considerable margin of 26 cents.

Revenues of $4.3 billion also exceeded the Zacks Consensus Estimate of $4.1 billion during the quarter. However, it fell 13% driven by weaker demand in truck, construction, and oil and gas markets in North America as well as in international markets for power generation equipments, and construction, truck and mining engines.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 decreased 2.4% to $8.76 per share. Meanwhile, the Zacks Consensus Estimate for 2014 fell 2.5% to $10.00 per share. The company retains a Zacks Rank #3 (Hold).

Cummins will benefit from new emission standards, fuel economy improvement with light-duty diesel penetration and favorable trends for its Power Generation business with increased demand for electricity against either aging or insufficient grid capacity.

In addition, the company has taken initiative to consolidate its position in the engine division.  Cummins has invested to expand its capacity. The company has also introduced new products including light-duty engines in the U.S. and China.

However, weak construction market had adverse impact on Cummin’s heavy- and medium-duty trucks, which constitutes 50% of the company’s portfolio.

Other Stocks to Consider

Commercial Vehicle Group Inc. (CVGI - Snapshot Report), Oshkosh Corporation (OSK - Snapshot Report) and Strattec Security (STRT - Snapshot Report) with Zacks Rank #1 (Strong Buy) are performing well in the same industry where Cummins operates.

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