Cummins (CMI) will release its sales and earnings results for the third quarter on Oct 30. The company reported earnings of $56 million or 28 cents per share in the second quarter, marginally higher than the Zacks Consensus Estimate of 26 cents per share, despite weakening demand from the global recession.

In fact, the Indiana-based manufacturer of auto components and power generation systems increased profit from $7 million, or 4 cents per share, in the first quarter, driven by cost reduction initiatives and alignment of manufacturing capacity to the reduced demand. However, the profit was significantly lower than $293 million, or $1.49 per share, reported a year ago. This was attributed to lower volumes, especially due to a steep decline in demand in the Engine and the Components segments.

For the current quarter, the Zacks Consensus Estimate is pegged at 37 cents per share. This is an improvement of 32% compared to the recorded earnings in the previous quarter as the company is set to benefit from fuel economy improvements, new emission trends and increased prices.

New emission regulations, in particular, create opportunities for Cummins such as the ability to raise prices, gain in market share and increase in engine content. To consolidate position in the engine division, Cummins invested heavily in capacity expansions and in introducing new products. The company has plans for 22 major facility additions or upgrades and is expanding its global distribution network. All these strategies are supported by its strong financial position.

Nevertheless, Cummins is yet to recover from the depressing macroeconomic environment in the U.S. The company’s heavy- and medium-duty trucks as well as construction markets have been hit badly in the recent past, with drops in demand in North America and Europe. For 2009, Cummins continues to expect sales 30% lower than the previous year. These lead us to recommend the stock as Neutral with a target price of $49.00.

Zacks Investment Research
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