CAT Losing Steam, Sales Moderate - Analyst Blog

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Caterpillar Inc.  ( CAT ) recorded machines sales growth of 30% for the three months ending November 31, continuing its 19-month run of positive sales growth, but hitting rock bottom so far in 2011. Engine sales increased 15% across the globe.

The 30% sales growth in November saw a percentage point drop from the 31% sales clip in the three months periods ending October and September. Sales growth has nonetheless moderated form the highs of 66% recorded in the month of April. Even though Caterpillar has seen sales ramping in the last 19 months, the rate of increase has of late been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe.

Regional Statistics

Region-wise, the company registered the maximum growth in North America of 41%, followed by Europe, Africa, and the Middle East (EAME) and Asia/Pacific with a 32% and 31% year-over-year increment, respectively. Rest of the world (ROW) and Latin America were up 25% and 8%, respectively.

Latin America, EAME and ROW witnessed the worst sales performance so far in 2011. Particularly in Latin America, the drop has been drastic, with the sales growth of 8% dropping from the hitherto double-digit pace and the peak of 76% witnessed in February 2011.

Latin America has in this year acted as a bulwark to Caterpillar's frenetic growth pace, helped by a boom in construction activity and mining expansion in up-and-coming countries like Brazil that called for more equipment sale.

Sales in EAME increased 32%, flat with September sales and more than half of the scorching pace of 65% recorded in May this year. The sharp downside was primarily due to the sovereign debt crisis in Europe.

Investments in infrastructure construction and mining in China, Australia and other developing economies have spurred demand for Caterpillar's machinery thereby contributing to solid growth in Asia Pacific. However, China's recent attempts to fight inflation, along with sales and production disruptions in Japan following the earthquake, have raised a question on the sustainability of Caterpillar's Asian sales growth.

In Reciprocating & Turbine Engine Retail Statistics, sales were up 15% year over year globally. Though the improvement was higher from the 13% recorded in the sequentially preceding month, it was much weaker than the 45% growth displayed in March, the highest rate this fiscal.

End Markets

Among the end markets, sales to the petroleum sector reported the maximum increase of 34% year over year, followed by Electric Power, with a 16% year-over-year climb. It is worth noting that both these sectors saw a smart improvement from corresponding growth of 25% and 6% in October.

The Industrial sector was a major disappointment, growing at 6%, the lowest in 2011. Growth has dipped to single digits compared with the high of 59% in January. Marine sales hit rock bottom with a 24% drop in sales after a 12% drop recorded in October. Sales growth in this category has been negative since September 2009. The sector had registered a climb in August 2011 of 6%, and since then has resumed its downward trend.

Third Quarter Recap, Guidance

During the recently reported third quarter, Caterpillar's revenues surged 41% to a record $15.7 billion, surpassing the Zacks Consensus Estimate of $14.7 billion, driven by higher volumes. For 2011, the company expects revenues to be around $56 billion and earnings per share of $7.25. Including the impact of the Bucyrus acquisition, EPS is forecast at $6.75 per share on the back of revenues of about $58 billion in 2011.

For 2012, Caterpillar expects revenues to be up 10% to 20% from the 2011 outlook of about $58 billion. The 2012 estimate includes a full year of Bucyrus-related sales of about $5 billion, up from a partial year of about $2 billion in 2011.

Our Take

Despite the lingering doubts overhanging the economy at large and Caterpillar's recent loss of sales momentum, we believe the top line would continue to grow on the back of torrid demand for construction and mining equipment. Besides, the Bucyrus acquisition will further add to the top line.

We hope to be more constructive on the stock once the company displays the high levels of growth booked earlier this year. The shares of Caterpillar presently retain a Zacks #3 Rank (short-term Hold recommendation). We also reiterate our long-term Neutral rating.

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
 
CNH GLOBAL NV ( CNH ): Free Stock Analysis Report
 
VOLVO AB ADR B ( VOLVY ): 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 , CNH , VOLVY

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