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Cummins Cuts Outlook, Fueling Talk of Global Economic Slowdown

July 11, 2012
The engine manufacturer said it now expects its full-year revenue to be flat year-over-year, citing weakness in emerging markets and a slowdown in the North American trucking market.

Engine manufacturer Cummins Inc. offered investors good news and bad news on Tuesday, but it was the bad news that grabbed the headlines, triggering a selloff of U.S. stocks and fueling speculation that a global recession could be imminent.  

Columbus, Ind.-based Cummins (IW 500/64), which earlier in the year forecasted a 10% jump in its 2012 revenue, said it now expects its full-year revenue to be in line with 2011, when it reported $18 billion in sales -- a record for the company.

The engine maker, which reports its second-quarter results on July 31, also said it expects Q2 revenue to be about $4.45 billion -- a good $500 million lower than what analysts had expected.

In a brief news release, CEO Tom Linebarger cited weaker demand in some markets, coinciding with a global slowdown.

"Order trends in the U.S. for trucks and power-generation equipment have softened, and demand in Brazil, China and India is not improving as we had previously expected," Linebarger said.

Cummins's sales also have been hurt "by the appreciation of the U.S. dollar against a number of currencies," he added.

The guidance revision from Cummins, along with Monday's forecast cut from industrial-machinery manufacturer Dover Corp. (IW 500/128), helped fuel anxiety that the economic conditions are deteriorating.

"It's no secret -- the global economy is slowing," Brian Rayle, managing director and equity research analyst for Cleveland-based Northcoast Research Holdings LLC, told IndustryWeek.

The news also triggered a selloff on Wall Street.

Shares of Cummins, which opened Tuesday at $96.64, closed at $86.91. Meanwhile, the Dow Jones Industrial Average dropped 83.17 points (0.65%), closing at 12,653.12.

'Drastic Cut to Expectations'

Investment-banking firm William Blair & Co. LLC, in a note to investors, called Tuesday's announcement "a drastic cut to expectations."

"We were surprised by the preannouncement, although the guidance cut was not completely unexpected," the firm said.

The firm added that Cummins could fall short of matching its full-year-2011 earnings per share of $9.07.

"We believe Cummins is attempting to figure out how to manage the cost structure in light of the downward revision to its outlook, and we will receive more clarity during the July 31 earnings call," the firm said in its note.

The announcement -- or at least "the size" of the downward revision -- also took Rayle by surprise.

Still, Rayle, who has a "neutral" rating on Cummins, likes the engine maker's long-term prospects.

"They're a premier manufacturer, globally diversified, with a great cost base and great balance sheet," Rayle said.

And not to completely overshadow the good news: Cummins on Tuesday boosted its quarterly dividend from 40 cents per share to 50 cents per share, a 25% increase.

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