Capital-goods stocks ended down on Wednesday, with many engine and heavy-equipment companies notably lower. Homebuilders were buoyed by the release of the Federal Reserve's Beige Book, a summary report on the state of the economy, which pointed at a strengthening housing market across all 12 Federal Reserve districts. However, original equipment manufacturers significantly underperformed after Cummins (CMI +1.10%) slashed its earnings guidance and profitability outlook.
Cummins is one of the nation's largest designers and manufacturers of engines for trucks and heavy equipment. In a statement released Tuesday after trading ended, Cummins CEO Tom Linebarger lowered guidance for a second time in 2012, projecting annual revenue of $17 billion rather than the $18 billion the company had previously expected. Linebarger, who came to the CEO role in January, blamed continued economic uncertainty causing "end customers [to delay] capital expenditures in a number of markets, lowering demand for our products." Linebarger singled out the North American heavy duty truck market and international power generation markets, particularly in China, as the most significant contributors to lowered expectations.
The company announced efforts to cut costs in the face of eroding revenue, including the elimination of 1,000 to 1,500 jobs by the end of the year and shutting down select manufacturing facilities. Cummins was down 3.4% at the end of trading on Wednesday.
Critical suppliers and partners to Cummins were also down Wednesday. One of the worst performers was Meritor (MTOR +0.00%), a drivetrain and braking system manufacturer that provides drive axles that are meant to accompany Cummins Signature 600 series engines. Meritor and Cummins developed the torque management axle/engine combination together, to offer a high-performing, low-weight, cost-effective system to truck manufacturers and operators. On Cummins' lowered guidance, shares of Meritor were down nearly 9%.
Shares of natural gas engine designer Westport Innovations (WPRT 1.34%) also fell, down 2.4% on Wednesday. Westport operates a joint venture with Cummins, aptly called Cummins Westport, to develop, manufacture, and sell natural gas-powered engines for use in heavy-duty applications like trucking, mining, and construction.
Cummins' grim outlook comes only a day after the CEO of automotive component and powertrain manufacturer BorgWarner (BWA +2.00%), Tim Manganello, expressed a similarly somber take on global demand. In an interview, Manganello stated that the "economic mood of not just the country but globally has gotten a little bit more conservative and a little bit more nervous," supporting Linebarger's concerns over uncertainty causing delayed capital investment. However, Manganello pointed to weakness in Europe, rather than North America and China, as the primary source of economic uncertainty. Shares of BorgWarner saw big drops for the second day in a row, falling 3.8% on Wednesday and nearly 10% for the week.
These more austere outlooks shouldn't be surprising, coming as they do on the heels of a lowered demand projection from the most important bellwether for original equipment manufacturers, Caterpillar (CAT +2.06%). The world's largest manufacturer of heavy construction equipment, announced only two weeks ago that it was lowering its earnings guidance by about 10%, because of what it saw as slowing global economic growth and a slower recovery in developed economies. With BorgWarner and Cummins now echoing Caterpillar's sentiment, shares of Caterpillar sank nearly 2% on Wednesday.
