We maintain our Neutral recommendation on
Caterpillar Inc.
(
CAT
) due to the recent loss of momentum in sales growth, margin
headwinds, negative impact of the European debt crisis and a
slowing Chinese economy. We currently have a Zacks #3 Rank
(short-term Hold recommendation) on the stock.
Caterpillar has kick started 2012 by posting record earnings per
share (EPS) of $2.37 in the first quarter. For fiscal 2012,
Caterpillar's sales guidance is in the range of $68 billion to $72
billion and has an EPS guidance of $9.50. This, if realized, would
mark a record in Caterpillar's history, even ahead of last year's
ground-breaking results.
However, on a monthly basis, there has been a clear downward trend
in sales growth year to date. Even though Caterpillar continues to
book sales growth, recent growth rates have been tempered by
tougher year-on-year comparisons and weakening economic conditions,
especially in Europe. Sales growth is now less than one-sixth of
the peak level of 66% in 2011.
Caterpillar recorded machines sales growth of 11% for the three
months ending May 31, 2012. Growth slackened from 27% in January,
21% in February, 18% in March and 12% in April this year. Compared
to the lowest growth rate of 30% last year, the current growth rate
of 11% is disappointing.
The Caterpillar-Bucyrus merger will position Caterpillar as the
leading global mining original equipment manufacturer. The combined
product portfolio will dwarf
Joy Global Inc.
(
JOY
), the only U.S.-based manufacturer of surface and underground
mining equipment.
Caterpillar expects Bucyrus to be accretive to its operating profit
by at least $450 million. Bucyrus has a wide product portfolio and
will complement Caterpillar's existing mining product line. The
Bucyrus acquisition will also help Caterpillar gain a strong
foothold in China and India, both of which are major mining
markets.
Caterpillar's order backlog has steadily increased throughout the
quarter and is at a record high, which holds promise for the year
ahead. Backlog stood at $30.7 billion, up from $29.8 billion at the
end of fiscal 2011. Many products have long lead times, with some
slated for 2014. This bodes well for Caterpillar's future
performance.
The company is persistently adding production capacity for many of
its mining products. We believe that the top line at the company
will continue to grow on the back of increasing demand for
construction and mining equipment. Caterpillar plans to open new
facilities and expand existing operations, particularly in the
emerging markets, which will boost its long-term potential.
Margins at Caterpillar may come under pressure from various
quarters. These include rise in period manufacturing costs; higher
SG&A expenses; R&D expenses, primarily related to
implementation of emission requirements; higher depreciation
expense as a result of increased capital spending, higher taxes,
incremental costs pertaining to Bucyrus inventory step-up and
acquisition and integration expenses, including severance costs and
other integration-related activities.
In addition to the European debt crisis, signs of a slowdown in
China have triggered concerns. China has slashed its 2012 growth
target to an eight-year low of 7.5%. A slowing Chinese economy will
have a detrimental effect on infrastructure and construction
spending with an immediate impact on Caterpillar's sales in the
near term.
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 two
divisions - Machinery and Power Systems 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
CNH GLOBAL NV (CNH): Free Stock Analysis Report
JOY GLOBAL INC (JOY): Free Stock Analysis
Report
(KMTUY): ETF Research Reports
VOLVO AB ADR B (VOLVY): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research