Caterpillar Upgraded to Outperform

Caterpillar Inc. (CAT) ended fiscal 2010 on a promising note coming off a very challenging 2009. It also maintained the sales momentum in its January results, giving 2011 a good start leading us to upgrade our recommendation to Outperform from Neutral.

The company’s fourth-quarter adjusted EPS increased almost four fold to $1.47 and fiscal 2010 adjusted EPS almost doubled to $4.15 from the prior-year comparable periods. Results outshined the Zacks Consensus Estimates of $1.27 and $4.01. Caterpillar also whizzed past its guided range of $3.80 to $4.00 for fiscal 2010. The upbeat results were helped by ever-increasing demand for mining and construction equipment that drove sales.

Revenues in the quarter were $12.8 billion, a 62% jump from $7.9 billion in the year-ago period and well above the Zacks Consensus Estimate of $11.4 billion. Region wise, North America led the pack with a growth of 78%, followed by Latin America, Asia-Pacific and EAME markets posting impressive growth of 59%, 55% and 49%, respectively. For fiscal 2010, revenues upped 31% year over year to $42.6 billion, outperforming the Zacks Consensus Estimate of $40 billion by a good margin. The reported revenue was also higher than the company’s guided revenue range of $41 million to $42 billion.

Caterpillar has maintained the sales momentum of 2010 by kick starting 2011 with a 49% year-over-year jump in global sales for January, a stark contrast to the 27% drop in sales for January 2010. This marks the ninth consecutive month of positive growth for the company. We expect Caterpillar to maintain its revenue growth trajectory, fueled mainly by growth in the emerging markets, the mining and energy markets and a recovery in the North American markets. Increased domestic and international infrastructure spending, improved economic conditions and benefits from yet-to-close acquisitions will support revenues over the next several years.

Caterpillar expects sales to cross the $50 billion mark in fiscal 2011, a 17% year-over-year growth driven by continued growth in the developing countries and improving economies in North America and Europe. EPS is expected to be around $6.00, suggesting a massive 45% year-over-year growth from the 2010 figure of $4.15. If Caterpillar is successful in attaining this target, 2011 will be a landmark year with the highest EPS in its history, topping the prior record of $5.66 set in 2008.

During the year, Caterpillar made a number of announcements to enhance its capacity for key products like mining trucks and excavators, which include three new facilities in the United States and significantly five outside the United States. Caterpillar plans to expend about $3 billion in capital expenditures, with more than half earmarked to be spent in the United States

Caterpillar’s strong brand name, pricing power and global dealer network enable it to take advantage of the growing need for infrastructure development worldwide. Caterpillar’s plans of opening new facilities and expanding existing operations, particularly in the emerging markets, will boost its long-term potential. The acquisition of Bucyrus International Inc (BUCY) will position Caterpillar as the #1 mining equipment manufacturer in the U.S. We currently have a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. Caterpillar operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

CATERPILLAR INC (CAT): Free Stock Analysis Report

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