Balanced Risk-Reward for Caterpillar - Analyst Blog

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On Mar 7, 2014, we issued an updated research report on Caterpillar Inc. ( CAT ). The mining equipment behemoth reported a 5% increase in its fourth-quarter 2013 earnings to $1.54 per share - the only quarter in fiscal 2013 to report year-over-year (y-o-y) growth. The company's incessant efforts to cut down costs helped mitigate the effect of lower mining-related sales on its profits.

Caterpillar expects revenues in 2014 to be flat with 2013 or move up or down in a 5% range and earnings per share at $5.85, reflecting 2% annual growth. Construction Industries and Power Systems revenues are expected to deliver sales growth, driven by better economic development. Caterpillar will also benefit from the recovery in the construction sector and macroeconomic stabilization in Europe. Management also expects a number of smaller acquisitions in 2014, focused on its Energy & Transportation segment.

Caterpillar will purchase approximately $1.7 billion of its common stock under an accelerated stock repurchase transaction in the first quarter of 2014, completing its $7.5 billion repurchase authorization. In addition, the company's board of directors approved a new $10 billion stock repurchase program that will expire on Dec 31, 2018. Share repurchases will be accretive to earnings in 2014 and provide support to the stock.

Caterpillar's share in the Chinese Excavator market has increased to 12%. The Chinese excavator market is expected to grow and Caterpillar can capitalize on the demand, given its expanding market.

Caterpillar has initiated extensive cost-saving programs across its global businesses. The company will continue to benefit from its additional restructuring actions in 2014 to optimize its cost structure and improve its operational effiency. Even though extensive restructuring actions have long-term benefits, they will impact profitability in 2014.

At the end of 2013, Caterpillar's backlog was $18 billion, down $1.1 billion sequentially and $2.2 billion year over year. The annual decline was due to reduction in order backlog for mining-related products in Resource Industries and a slight decline in Power Systems, which offset a substantial increase in Construction Industries. Order rates will have to pick up from current levels to meet the company's guidance. Sales in Resource Industries will continue to be affected as mining companies keep reducing their capital expenditures in 2014.

Caterpillar currently carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks that are worth considering in this sector include H&E Equipment Services Inc. ( HEES ), The Manitowoc Co., Inc. ( MTW ) and Komatsu Ltd. ( KMTUY ). While H&E Equipment Services sports a Zacks Rank #1 (Strong Buy), Manitowoc and Komatsu carry a Zacks Rank #2 (Buy).



CATERPILLAR INC (CAT): Free Stock Analysis Report

H&E EQUIP SVCS (HEES): Free Stock Analysis Report

KOMATSU LTD ADR (KMTUY): Get Free Report

MANITOWOC INC (MTW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CAT , HEES , KMTUY , MTW

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