Can Cummins Avoid an Engine Failure in 2016?

Image source: Cummins.

The fortunes of engine maker Cummins (CMI 0.14%) are closely tied to the health of the industrial economy, and right now, many investors are extremely worried that the cyclical downturn we've seen lately will last a lot longer than originally thought. For Cummins, which will release its fourth-quarter financial report on Thursday, the resulting pressure has weighed on its sales and earnings, and most shareholders expect that trend to continue not only in the fourth quarter, but throughout 2016. Just as equipment maker Caterpillar (CAT 0.13%) has projected weak end markets for its products, so too does Cummins face the prospect of a tough future.

Let's take a closer look at Cummins to see whether it can break out of its downturn and give shareholders the growth they want to see.

Stats on Cummins

Source: Yahoo! Finance.

What's next for Cummins earnings?
In recent months, investors have dramatically reduced their views on Cummins earnings. The cut to fourth-quarter projections has been limited to less than a dime per share, but full-year 2016 earnings estimates have fallen by more than $1 per share. The stock has also continued its descent, falling another 19% since late October.

Much of those declines came in the wake of Cummins' third-quarter results, which showed just how difficult the current environment is right now. Revenue fell more than 5%, and a 10% decline in earnings was far worse than the gains most investors had expected to see. Although Cummins stayed strong in its core North American market, extreme weakness in its international segment came both from poor economic conditions there as well as currency-related factors. When explaining the shortfall, CEO Tom Linebarger pointed to multi-year lows in demand from key emerging markets China and Brazil, and the company also cut its guidance for the full year.

If anything, the situation has gotten worse for Cummins in the months since its last earnings report. The oil market has continued to struggle, and the fact that crude prices have hit levels not seen in more than a decade has only made it more difficult for would-be customers to buy trucks and other equipment containing Cummins components. In light of Cummins' decision to lay off 2,000 workers in an effort to restructure itself and cut costs, the company doesn't seem to expect much of a quick turnaround.

Part of the problem Cummins and Caterpillar both share is that their diverse exposure to different industries isn't doing them any favors in the current environment. Ordinarily, Caterpillar's different segments -- which include energy and transportation, resource industries, and construction -- would give the company some protection against weakness in one area of the business, but all of Caterpillar's segments have struggled in light of current conditions. Similarly, Cummins sells engines for everything from trucking to construction and agriculture, mining, marine applications, energy, and railroads. Nearly all of those areas have seen some recent challenges, and that is holding Cummins back overall.

In the Cummins earnings report, investors need to be prepared for more bad news and the potential for further gloomy guidance for 2016. Until the global economy starts to pick itself up off the mat, Cummins shareholders could see more losses in the stock price. Once volatile areas like commodities start to recover, only then is it likely that we'll see Cummins reach its full potential.