Caterpillar on a Roll, July Up

Caterpillar Inc. (CAT), citing robust growth across all regions, reported a 32% year-over-year jump in global sales for the three-month rolling period ended July 2010, a stark contrast to the 48% drop in sales in the comparable year-ago period. In May 2010, the company had recorded a growth of 11%, reversing a long trend of global decline since September 2008. Compared to May, growth doubled in June and almost tripled in July.

Growth in July was led by the Asia Pacific region with sales increasing 41% compared with a 30% decline in the year-ago period. The Asia-Pacific region has been Caterpillar’s fastest growing geographic market in recent years as rapid infrastructure development and mining expansions fueled demand for machinery. The region has posted continuous growth since March 2010 after suffering declines in 2009. Sales growth on a month-on-month basis shows a continuous upward trend from 11% in March 2010 to reach 41% in July.

The North American markets followed with a growth of 38% in the reported month, a noteworthy improvement from the decline of 59% in July 2009 and increase of 26% in June 2010. Latin American markets posted a 32% increase and EAME (Europe, Africa and the Middle East) upped 19% in the period.

As per sector-wise business performance, Caterpillar saw reciprocating and turbine engines sales in the industrial segment jump 31%, sales to the electric power unit rose 14% and sales to the petroleum sector inched up 3%. Sales to the marine sector remained weak, dropping 34%. Sales growth to the petroleum sector comes after a long wait as the sector had last seen growth in April 2009.

Looking Forward

Caterpillar affirmed its earlier guidance of revenue in a range of $55–$60 billion and earnings per share in a range of $8–$10 for fiscal 2012. The company plans to invest in global expansion and fine tune operational execution to drive profits over the next five years.

Caterpillar also confirmed its previously declared goals that are focused on delivering superior earnings per share growth, operating profit after capital charge and cash flow through 2015. The company strives to become the global leader in its area of businesses and products, as well as inculcate the best team of people. Caterpillar also expects to boost its share of industry sales and aftermarket parts growth.

Caterpillar’s targets are all geared toward delivering total shareholder returns over the business cycle to reach the top 25% quartile of the S&P 500. The company believes, in order to accomplish the above-mentioned ends, it has to deliver compound annual earnings per share growth of 15%–20% over the business cycle.

The Caterpillar Production System (“CPS”) will be helpful in executing its strategy as it has led to gains in product quality, cost savings and employee safety. This system has also been instrumental in the company’s improvement in manufacturing efficiency every quarter since the end of 2008.

Leveraging its strong financial position, Caterpillar has in the past few months announced investments of roughly $2.5 billion. These investments, encompassing United States, Brazil, China and India, involve opening new facilities, expansion of existing operations and development of a new mining shovel product line. The investments also include the acquisition of Electro-Motive Diesel.

It is encouraging to see the company delivering on its promises and even exceeding them. Caterpillar’s 2009 sales of $32.4 billion were within its guided range of $32–$33 billion. Its EPS of $2.18 for the fiscal outperformed the company’s expectation of $1.85–$2.05 per share. In the recently reported second quarter of fiscal 2010, Caterpillar’s EPS of $1.09 exceeded the Zacks Consensus Estimate of 85 cents, keeping up with its outperforming trends in the past three quarters.

For fiscal 2010, Caterpillar expects revenues to be in the range of $39–$42 billion, compared with its previous guidance of $38–$42 billion. The fiscal 2010 EPS outlook was also increased to a range of $3.15–$3.85 from $2.50–$3.25 earlier. The Zacks Consensus Estimate for fiscal 2010 currently stands at $3.69.

The increased outlook is driven by heightened revenue expectations, margin expansion given its cutting efforts, favorable material costs and the absence of redundancy costs. These positives are, however, expected to be partly offset by an unfavorable product mix, higher income taxes, increased research and development expenses, pension expenses and incentive compensation.

We believe Caterpillar’s investments in expansion and acquisitions would boost its long-term earnings potential. We particularly appreciate Caterpillar’s expansion plans in the emerging markets. Robust growth in the Asia-Pacific region and Latin America, and continued improvement in the mining and energy markets will strengthen Caterpillar’s volumes and sales. The company will be a prime beneficiary of increased domestic and international infrastructure spending, going forward. We maintain our Outperform rating on Caterpillar supported by a Zacks #1 Rank (‘Strong Buy’).

CATERPILLAR INC (CAT): Free Stock Analysis Report

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