We have recently downgraded our recommendation on
Caterpillar Inc.
(
CAT
) from Outperform to Neutral due to the recent loss of momentum in
sales growth, margin headwinds, negative impact of the European
debt crisis and a slowing Chinese economy. The quantitative Zacks
#3 Rank (short-term Hold rating) for the company indicates no clear
directional pressure on the shares over the near term.
In 2011, Caterpillar recorded an impressive 88% surge in profits
to $7.79 per share (excluding the impact of acquisition of
Bucyrus), driven by record sales. Total revenue increased 35% to
$57.6 billion, excluding the impact of acquisition of Bucyrus.
After accounting for the Bucyrus acquisition, Caterpillar witnessed
an all time record sales of $60.1 billion, up 41% from 2010, driven
by increased sales volume (particularly new equipment) on higher
end-user demand. Including the effect of Bucyrus, profit per share
was $7.40, up 78% from $4.15 in 2010.
The Caterpillar-Bucyrus merger will position Caterpillar as the
leading global mining original equipment manufacturer and 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 in fiscal 2012.
Caterpillar has a narrow product line compared to Bucyrus, which
has a broad product portfolio. The Bucyrus acquisition will also
help Caterpillar to gain a strong foothold in China and India, both
of which are major mining markets.
Caterpillar's financial position strengthened through fiscal
2011. The company's Machinery and Power Systems (M&PS)
operating cash flow was $8 billion, an improvement of 43% over 2010
and an all time record. The positive cash flow resulted from
continued strong performance and a significant focus on asset
management. This, in turn, has facilitated Caterpillar to fund
acquisitions of around $10 billion without diluting shareholder
value. Even with the acquisitions, Caterpillar had more than $3
billion in cash on its balance sheet with Machinery and Power
Systems debt-to-capital ratio of 42.7%, as of fiscal 2011 end.
Despite the relatively weak economic growth in 2011,
Caterpillar's order backlog increased steadily throughout the year
and was at a record level, which holds promise for the year ahead.
Backlog (excluding Bucyrus) stood at $29.8 billion, up 59% from
$18.7 billion at the end of 2010 and 4% above the third-quarter
end. Besides, many products have long lead times, with some slated
for 2014. This bodes well for Caterpillar's future performance.
The company is doggedly adding production capacity for many of
its products. Caterpillar's recent string of investments include
expansion in Tosno, Russia for off-highway trucks, a new mining
truck facility in Indonesia and expansion of existing facility,
capacity expansion of mining trucks produced in Illinois, expansion
of mining truck capacity and a new small engine facility in India,
and also a new small excavator and tractor facility in Georgia. A
new parts distribution center in California and expansion of an
R&D center in Wuxi, China are in the pipeline.
Caterpillar recently announced the expansion of its
manufacturing facility in Xuzhou, China, which would augment
hydraulic excavator production by a substantial 80%. Furthermore,
it is adding another product line and expanding its wholly owned
Chinese construction equipment company, Shandong Engineering
Machinery. In a bid to expand its parts distribution network,
Caterpillar is building a new parts distribution center in San Luis
Potosi, Mexico. We believe the top line at the company will
continue to grow on the back of increasing demand for construction
and mining equipment. Caterpillar's expansion plans of opening new
facilities and furthering existing operations, particularly in the
emerging markets, will boost its long-term potential.
On the flipside, Caterpillar machines sales growth of 21% for
the three months ending February 29, 2012, dipped further from the
lowest growth rate of 30% last year and from the 27% clip recorded
in January 2012. Even though Caterpillar has seen sales ramping in
the last 22 months, the rate of increase has of late been tempered
by tougher year-on-year comparisons and weakening economic
conditions, especially in Europe. Sales growth is now less than
one-third of the highest level of 66% recorded in 2011.
Margins at Caterpillar may come under pressure from various
quarters. These include higher manufacturing costs, steeper
selling, general and administrative expenses, and spiraling
research and development expenses to meet stringent emission
requirements. Besides, the Bucyrus inventory step-up and costs
associated with integration would burden margins.
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 negative 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
VOLVO AB ADR B (
VOLVY
): Free Stock Analysis Report
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