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Cummins' Earnings Slump Continues as Light-Duty Engines Sputter

By Dan Caplinger - Feb 4, 2016 at 11:11AM

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The engine maker didn't see revenue fall as much as expected, but it's still facing tough conditions.

Image source: Cummins.

2015 was a terrible year for many industrial companies, and engine maker Cummins (CMI 0.22%) has had to deal with macroeconomic headwinds that held back its business from growing. Just as heavy-equipment maker Caterpillar (CAT 0.95%) has seen sales of its products fall sharply, so too has Cummins seen weak demand for its engines in global industrial markets, and declining production of heavy-duty trucks has reflected the poor economic conditions across the globe. Coming into Thursday's fourth-quarter financial report, Cummins investors were expecting declines in revenue and net income, but the bottom-line hit that the company took surprised even those pessimistic investors who had taken Caterpillar's earlier results to heart in projecting bad news for the engine-maker. Let's take a closer look at the latest from Cummins and what it sees ahead for 2016 and beyond.

Cummins keeps sputtering
Cummins' fourth-quarter results were mixed, reflecting the loss of confidence that many investors had suffered late last year. Revenue fell more than 6% to $4.77 billion, but that was actually somewhat better than the steeper 8% drop that most of those following the stock were expecting. Net income plunged by nearly two-thirds to $161 million, and even after accounting for a large impairment charge and restructuring costs, adjusted earnings of $2.02 per share came in almost a dime per share lower than the consensus figure among investors.

A closer look at Cummins' numbers reveals some of the same trends that Caterpillar has seen. The North American market held up reasonably well for Cummins, but it still weakened by 2% from year-ago levels. That was the first year-over-year decline Cummins has seen in its home market in 2015, but it still compared favorably to the 12% drop in the company's international sales. Cummins highlighted Latin America as having been particularly weak, and overall, weaker foreign currencies cost the company about 4 percentage points of sales growth.

Among Cummins' major segments, the news was poor across the board. Engine sales fell 11%, cutting operating income by 40% from the year-earlier quarter. Power-generation equipment revenue declined 14% and saw operating income cut in half, and sales of components fell 6%, although that unit managed to increase its operating income by almost 10%. As we've seen in previous quarters, the distribution segment eked out a 1% gain, but that was driven by acquisition-based revenue, without which the unit would have seen a 2% drop in organic sales.

CEO Tom Linebarger took the results in stride. "A combination of weak end markets and a stronger U.S. dollar presented significant challenges to our performance," Linebarger said, and he pointed to the restructuring efforts that Cummins imposed as a good start toward making improvements for 2016.

What Cummins is doing now
Nevertheless, Cummins sees some tough times ahead for its business. COO Rich Freeland said that the engine maker "expects to scale back the range of light duty engines it plans to manufacture in North America," which necessitated a $211 million impairment charge to revalue the company's manufacturing assets related to the engine line. Freeland also expressed "uncertainty of winning additional customers for the V8 light duty engine" despite making it clear that Cummins intends to support its customers' needs in the area.

For 2016, Cummins followed Caterpillar's lead in expecting further difficulties. Full-year 2016 revenue will decline 5% to 9% compared to 2015, according to Cummins, and pretax operating margins will fall to between 11.6% and 12.2%.

Cummins investors didn't immediately react sharply to the news, and the stock fell less than 1% in the first hour of premarket trading following the announcement. Nevertheless, with Cummins, Caterpillar, and other industrial companies facing the same challenges, the entire sector could face a tough road in 2016 unless macroeconomic conditions start changing for the better.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Caterpillar Inc. Stock Quote
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