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Cummins stock climbs as earnings exceed estimates

Cummins’ economic recovery forecast relies on continued expansion of the North American heavy-truck sector.

GEOFF ROBINS/The Globe and Mail

Cummins Inc. 's quarterly profit beat Wall Street expectations on higher demand for its engines from the truck and off-highway construction markets in North America and strong global mining markets, leading its shares sharply higher.

Cummins reported a 36-per-cent rise in adjusted quarterly profit and higher margins in its core engine business on Thursday. It projected 10-per-cent revenue growth and stronger operating margins in 2012, with sales expected to hit $20-billion.

Cummins is the latest company in the industrial sector to report strong results for the fourth quarter and to forecast economic recovery – particularly in North America – in 2012.

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Jeffries & Co. equities analyst Stephen Volkmann said in a note to investors that Cummins' fourth-quarter revenue was stronger than expected. He said strength in North America and other business segments helped offset investor concern about Cummins' "relatively high emerging markets exposure."

Cummins said 2012 earnings before interest and taxes are expected to represent 14.5 to 15 per cent of revenue in 2012, or nearly $3-billion. That compares with $2.56-billion in 2011. The company's outlook for 2012 is in line with analysts' expectations.

Cummins' economic recovery forecast relies on continued expansion of the North American heavy-truck sector, offsetting lower volume expectations for key emerging markets, including China and Brazil.

Cummins' earnings came two days after Paccar , a truck maker that is a major Cummins customer, reported a 93-per-cent increase in quarterly earnings and forecast growth in North America and continued weakness in Europe.

In addition to sales to truck makers, Cummins also relies heavily on buyers of its power products, such as generators. Activity in the residential and non-residential construction sectors, and in the gas and oil exploration industry, helped drive demand.

Cummins also provides emissions technology that has allowed it to be one of the primary beneficiaries of the industrial sector's race to meet government regulations.

The company said demand weakened in China's construction market in the fourth quarter, and demand for power products in India also slowed. But continued need for infrastructure development and other economic activity could lead to a stronger second half of 2012 in developing countries, it said.

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Growth in the mining sector – which purchases Cummins engines and power equipment –bolstered Cummins' fourth-quarter results, much as it did throughout 2011 at other U.S. equipment makers, such as Caterpillar Inc.

Cummins' adjusted income for the fourth quarter was $491-million or $2.56 a share, up from $362-million or $1.84 a year ago. Analysts had expected $2.23 a share, according to Thomson Reuters.

Revenue increased 19 per cent to $4.9-billion.

Fourth-quarter earnings included an insurance settlement and the sale of two businesses from its components segment.

Cummins said it expects capital spending of $800-million to $850-million in 2012, and contributions of $130-million to global pension funds.

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