October 31, 2017 / 3:12 PM / a year ago

Cummins shares fall on weaker margins despite profit beat

Oct 31 (Reuters) - Truck engine manufacturer Cummins Inc posted better-than-expected quarterly profits and revenues on Tuesday, driven by strong demand for new trucks and construction but shares fell nearly 3 percent as investors reacted to lower margins.

The Columbus, Indiana-based company said it expects full-year 2017 revenue to grow 14 percent to 15 percent, up from its previous growth projection of 9 percent to 11 percent, but left unchanged its forecast for pretax earnings.

"The biggest reason shares fell is softer EBIT margins and weaker incremental margins," said Edward Jones Analyst Logan Purk. "A strong earnings print, but weaker operating leverage is not what investors want to see during an upcycle." EBIT refers to earnings before interest and taxes.

Cummins reposted quarterly earnings per share of $2.71 compared with the $2.46 that Wall Street analysts expected. Quarterly revenue totaled $5.3 billion versus Wall Street estimates of $4.78 billion, driven by higher demand in the truck, oil and gas and construction markets.

Despite better-than-expected sales, incremental margins in the mid-teens in percentage terms came even as activities related to oil, gas, and mining picked up and its business in China continued to be strong, said Jefferies analyst Stephen Volkmann.

"The focus will be on the headwinds that appear to be limiting incremental margins despite good revenue growth going into 2018," Volkmann said, referring to what investors are watching for.

The company said international sales jumped 28 percent primarily due to strong truck and construction demand in China, sales of new products in India, and increased demand from global mining customers.

Shares fell 2.8 percent to $175.39. (Reporting by Eric M. Johnson in Seattle; Editing by Jeffrey Benkoe)

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