Large Truck Engine Market will Stay Bearish
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Cummins has been in a downward trend for months now. The recent lowering of its forecast for 2012 just exasperates the whole problem for the large engine market. Can we see any hope of a near turn reversal for the company and the industry?
For the second time this year, U.S. engine maker Cummins (NYSE: CMI) lowered its 2012 forecast. What are its reasons for doing this? It says that customers are just not spending because of the weakening global economy.
Now the company is expecting sales to reach $17 billion--a full $1 billion less than it anticipated after the last adjustment. Chief Executive Tom Linebarger said:
“We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy. As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products.”
Two markets in particular have been affected. The North American heavy truck market and the International power generation markets.
Heavy Truck Market- heavy truck orders have been seeing cancellations throughout the year and the fastest in the last two years because of the stagnating economy. Fleet owners are either delaying orders or totally scrapping new purchases right now. Paccar (NASDAQ: PACR) reported a 24% rise in sales last quarter but this was a slow down and the company warned weak U.S. and European economies could hurt truck sales for the rest of the year. PACR, with its decline in revenue, underperformed when compared the industry average of 6.7%. Gross profit margins are also down and are extremely low, coming in at 10.50%. It has decreased from the same quarter the previous year. Net operating cash flow has significantly decreased to -$7.20 million or 201.40% when compared to the same quarter last year. It is no wonder delays and cancellations in truck orders are taking place.
Navistar International (NYSE: NAV) told employees last quarter that it is looking at the option of voluntary departures and involuntary layoffs to cut costs. And a voluntary separation program for salaried full time employees has been announced. High inventory and declining orders threaten production rates. The company has lost $241 million through the first nine months of this fiscal year and analysts do not expect it to return to profitability until the third quarter of fiscal 2013. It has already identified operations that generate $260 million worth of revenue that it could close or sell, which its projections show would boost profit by about $52 million by lowering costs.
Clarcor (NYSE: CLC) is another company that competes with Cummins in the heavy duty, original equipment manufacturer filtration sector. It also has reported declining revenue for the third quarter because of lower than expected revenue. Chief executive Chris Conway explains why:
“Our third quarter financial results were below our internal expectations heading into the quarter primarily due to lower than expected sales of heavy-duty engine filtration products in the domestic aftermarket and China.”
And just like Cummins, Clarcor also lowered its full year earnings guidance to a range. Net income fell 6 percent. For the quarter ended Sept. 1, Clarcor earned $30.3 million, or 60 cents per share, down from $32.1 million, or 63 cents per share, in the same quarter last year. Revenue edged up less than a percent to $286.7 million while analysts expected a profit of 69 cents per share, on $298.9 million in revenue.
For this reason the company is still in a contraction phase. 1500 jobs are going to be cut by year’s end. There may also be work-week reductions and some plant shutdowns if the need arises. Since the company is still retracting, I would expect the present trend to continue.
I do not see a point where this industry will turn around in the next couple quarters. I believe it may be mid 2013 before we see anything positive come out of here at the earliest.
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