Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Dow 30 Earnings: Caterpillar Inc.- Fourth Quarter 2011
The world's largest machinery manufacturer Caterpillar (CAT- Free Caterpillar Analyst Report) has reported better-than-expected results for the fourth quarter. The Dow-30 component logged a 35% sales advance in the term, to $17.24 billion, driven by gains in several key end markets. Moreover, the performance suggests that global economic and industrial activity have shown some improvement. Caterpillar stock traded higher following the earnings release.
Leading the way was strength in many commodity markets. While crop and metals prices are off their highs reached in the early stages of 2011, they remain appealing from an investment perspective, driving demand for large mining equipment. Also, favorable energy market fundamentals have encouraged spending, with purchases of engines and turbines rising as a result. In addition, firming conditions in global construction benefited the maker of earthmoving and building equipment. After posting modest year-over-year gains over the first 10 months of 2011, the number of U.S. housing starts improved in November and December. All told, the need to replace older equipment in most developed countries, and demand for new machines in emerging markets, lifted Caterpillar's performance across the board in the December period.
At the same time, the fourth quarter was the first full period to include the results of mining equipment maker Bucyrus, acquired in mid-2011. In all, higher sales, which benefited from improved price realizations, overcame an increase in the cost of goods sold (manufacturing and freight expenses). This resulted in share earnings of $2.32, exceeding our $1.81 estimate and the year-earlier tally of $1.47.
For 2011, CAT delivered record-breaking sales of $60.13 billion, a 41% gain over the prior-year figure. That marked Caterpillar's largest single-year percentage increase since 1947, and much of it was driven by demand for products and services outside the United States. In the same vein, 2011 exports of nearly $20 billion were an achievement. With demand on the rise, the company boosted production for the year and improved its on-time delivery. All told, full-year share net reached $7.81, an 88% advance from 2010's depressed tally.
Momentum appears to be continuing into the new-year. Caterpillar is looking for decent worldwide economic growth in 2012, with Japan and the United States expected to lead the way. Along with this expansion comes the likelihood of solid gains in commodity demand. In all, the company is looking for copper to average $4 per pound, Central Appalachian coal to approach about $75 per ton, and West Texas Intermediate crude oil to average $100 per barrel. Eager to feed a voracious market, producers of copper, oil, iron ore, and coal will likely increase investments in equipment. With recently acquired Bucyrus (purchased for $8.8 billion) now fully integrated, and taking into account the pending buyout of Hong Kong-based ERA Mining Machinery Ltd. (a deal worth $890 million), we think Caterpillar has greatly enhanced its position.
The central banks of Japan and the United States. have declared their intent to increase liquidity and keep interest rates near historic lows through, in the latter case, late 2014. Meanwhile, although current conditions in the euro zone remain challenging, economic growth may be in the cards by the latter half of 2012 or 2013. Elsewhere, China took its first easing actions in late 2011, with the possibility of additional stimuli to follow.
In order to benefit from such a setting, Caterpillar is expanding production capabilities for tractor facilities and locomotive manufacturing in the United States. Concurrently, it is boosting capacity to make excavators and mining trucks in the developing world.
The confluence of these factors suggests that Caterpillar is on course for another good year. Management is looking for share net to approximate $9.25 in 2012 on sales of $68 billion-$72 billion. Our top- and bottom-line estimates are set at $70 billion and $9.20 a share, respectively.
About The Company: Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales made up about 68% of the company’s total in 2010.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.