On Dec 20, we downgraded Cummins Inc. (CMI) to Underperform from Neutral. The downward revision was based on the weakness in operating markets, especially India, high competition and expectations of revenue decline.
Why the Downgrade?
On Oct 29, Cummins posted net earnings of $362 million or $1.94 per share (excluding special items) in the third quarter of 2013, lagging the Zacks Consensus Estimate of $2.10 per share. However, earnings increased from $336 million or $1.78 per share in the comparable year-ago quarter.
Following the release of the third quarter results, the Zacks Consensus Estimate for Cummins’ 2013 earnings decreased 6.3% to $7.57 per share. The Zacks Consensus Estimate for 2014 dropped 5.4% to $9.32 per share. Currently, Cummins retains a Zacks Rank #4 (Sell).
We are concerned about the weakness in operating markets, which could mar the results of the company. Cummins is witnessing a challenging situation mainly in India. Demand from India declined by 25% in third-quarter 2013 due to weak industrial activity and rising inflation.
Moreover, Cummins operates under a highly competitive environment. New technologies, including those developed for gasoline, will provide further competition for the company.
In addition, Cummins now expects revenues to decline 3% from the 2012 level, against the earlier guidance of in-line results. The company also slashed its 2013 EBIT margin guidance to 12.5%–13% from 13%–14%.
Other Stocks to Consider
Tower International, Inc. (TOWR), Gentex Corp. (GNTX) and Lear Corp. (LEA), all with a Zacks Rank #1 (Strong Buy), are performing well in the auto and truck industry.