Cummins Inc. reported a slight sales decline in the second quarter as the strength of the North American market was more than offset by weakness in overseas markets.
However, Cummins stock surged Tuesday because of the company’s continued solid profitability, two local investment analysts said.
Second-quarter sales, at $4.45 billion, fell about 4.1 percent from the second quarter of 2011.
Although net income fell 7.1 percent to $469 million, the company said that excluding the impact of divestitures, earnings per share increased 4 cents to $2.45 from the second quarter last year.
“The company continued to deliver strong profits despite the weakening global economic conditions,” said Tom Linebarger, the company’s chairman and chief executive officer.
Linebarger said second-quarter gross margins — or the difference between sales and the cost of those sales — reached record levels.
Sales in the Engine Segment fell 2 percent to $2.8 billion. Lower demand in the Chinese construction, Brazilian truck and North American oil and gas markets offset more sales of North American trucks and construction equipment.
The segment’s earnings before interest and taxes fell $1 million, to $376 million, compared to the second quarter of 2011.
Sales for the Components group was flat at $1 billion. The company reported better results in North America and Brazil, but weaker demand in Europe and China.
Earnings before interest and taxes for the Components segment were $116 million, down $4 million.
The Power Generation group produced sales of $909 million in the second quarter of 2012, about even with results from a year ago. Lower demand in Europe, China and Latin America nullified improved sales in North America.
The Power Generation unit’s earnings before interest and taxes, at $94 million, fell by $11 million.
The Distribution business recorded sales of $794 million, up 1 percent, as declining sales in North America and the Middle East were offset by strong demand for parts and services in other regions.
Earnings before interest and taxes for the Distribution business fell by $14 million to $92 million.
Craig Kessler, president and chief investment officer of Columbus-based Kessler Investment Group, said investors are reacting positively to Cummins’ ability to continue to improve productivity.
“That’s helping their bottom line, even though they’re seeing some revenue growth slowdown,” Kessler said.
Mark Foster, chief investment officer of Columbus-based Kirr, Marbach & Co., said that when Cummins announced July 10 that sales this year were going to be flat, some questions remained about how that would affect profits.
Tuesday’s results allayed some of the investors’ concerns, Foster said.
Kessler said shortly after the announcement that investors were overreacting a little bit. On Tuesday, he said investors now are realizing that Cummins deserves some credit for acknowledging and addressing the slower growth in some overseas markets.
Cummins is continuing to produce solid results, which is signaling that the headlines sometimes are darker than reality, Kessler said.
At some point, Foster said, the markets are going to rebound, and investors are thinking that if the company in the current circumstances generates a little more profit than they thought, the company should make even more money when the economy improves.
Cummins has laid out a solid plan, but the business is not going to improve in a straight line.
“But they’re focused on the long-term (and) should continue to do well,” Foster said.
Cummins shares on Tuesday closed at $95.90, up 5.99 percent. The Dow Jones Industrial Average fell 0.49 percent.
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