UPDATE 4-Cummins profit falls on slower engine sales

(Adds CEO comments, updates share movement)

By Susan Kelly

CHICAGO, Oct 28 (Reuters) - Diesel engine maker Cummins Inc. on Tuesday reported disappointing quarterly earnings amid a stubborn slump in truck demand, sending its shares lower.

Cummins, whose shares were down almost 7 percent in their worst one-day drop in a year, said third-quarter net profit fell by 45 percent as sales dipped, and it forecast full-year earnings at the lower end of its previous outlook.

Demand for trucks has been recovering at a painfully slow pace since collapsing three years ago due to the economic slowdown. Investors earlier this month had bid up Cummins shares to their highest price in four years, as they hoped for a bottom in the truck cycle.

"The end market growth, to me, is not as strong as people were predicting," said James Sanders, equity analyst at Standard and Poor's Investment Advisory Services, who rates Cummins stock a "sell."

Automotive market revenue declined 15 percent from a year ago, when orders jumped ahead of stricter federal pollution guidelines for heavy truck diesel engines which took effect in October 2002.

"You are comparing against an artificially high quarter last year because of the engine pre-buy," said Jeffrey Kauffman, analyst with independent research firm Fulcrum Global Partners, who rates Cummins stock a "buy" and believes the company is poised to benefit from a coming upturn in the truck market cycle.

Columbus, Indiana-based Cummins said third-quarter net income fell to $24 million, or 60 cents a share, from $44 million, or $1.05 a share, a year ago.

Analysts on average had expected earnings of 67 cents a share, with estimates ranging from 62 cents to 73 cents, according to Reuters Research, a unit of Reuters Group Plc.

Sales fell to $1.63 billion from $1.65 billion a year ago, when demand jumped as freight haulers rushed to buy trucks with older-model engines before the new pollution rules took effect.

Cummins said its total engine business sales fell 9 percent in the third quarter to $942 million. It noted demand in many of its North American engine markets had not yet fully recovered.

Cummins Chairman and Chief Executive Tim Solso said the recovery in its markets has been "gradual."

"We have in the past couple of months had more interest from large fleets and more inquiries than we had earlier in the year, and we're just seeing some activity from that," Solso told analysts on a conference call.

Cummins is battling for market share with Caterpillar Inc. as both race to develop cleaner engines ahead of more federal emissions rule changes in 2007.

Fitch Ratings managing director Mark Oline said Cummins is positioned to benefit as the truck market rebounds, but expressed concern about the company's ability to compete in the capital-intensive engine technology business over the long haul.

"Despite the fact that the company has remained profitable during the trough, the question remains over the long term whether they will have enough profitability to sustain the research and development expenditures necessary to stay competitive," Oline said.

The company said it expects 2003 earnings to be at the low end of its previously forecast range of $1.20 to $1.40 a share due to "uncertainty in the marketplace."

Analysts on average were expecting Cummins to earn $1.27 a share in 2003, according to Reuters Research.

Cummins shares were down 6.9 percent at $45.83 on Tuesday afternoon on the New York Stock Exchange, off an earlier low of $45.50.