) plans to announce its 2011 Q2 earnings on Friday (7/22). In the
past quarter, Caterpillar's revenue from machinery and engines
sales volume increased 63% year-on-year on commodity demand in
emerging markets driving mining capex globally in addition to the
modest economic recovery in developed markets. We expect these
trends to continue this quarter although the growth rate will
likely moderate due to recent macro uncertainty surrounding the
European debt crisis and Japan's disruptions. Machinery revenues
will likely reflect the recent completion of the Bucyrus
acquisition earlier this month. Caterpillar's machinery and engines
business competes with Deere and Co. (
), Komatsu (TYO:6301), Terex (
), Hitachi Construction Machinery (TYO:6305), Cummins (
), GE Energy (
), Wartsila (HEL:WRTBV), etc.
Our $116 price estimate for Caterpillar stock
is about 6% above market price.
Macro Headwinds Will Show in Q2 Results
Construction and farm machinery sales are closely correlated to
the health of economy. Therefore in 2011 Q2, while construction and
other machinery sales will continue growing along with the global
GDP, its rate of growth will likely moderate due to the many global
1. Risk of EU default leading to market uncertainty
- EU heads, led by France and Germany are trying to
restructure Greek debt held by banks but uncertainty remains over
whether rating agencies will still view this event as a default -
which can have serious repercussions for entire Europe. Also there
is increasing political uncertainty in Germany over the Greek debt
2. Oil price hikes but this is easing already - Since
after September 2008, crude oil prices reached a high of $113.93 in
April 2011 before easing to $91.16 in June 2011. This indicated
greater relief for consumers at the pump, but prices have been
creeping up again this month and has the potential to add a speed
bump to Caterpillar's growth.
3. Supply disruptions after tragic Japan earthquake
- Caterpillar expects it to negatively effect its revenues by $300
million in 2011.
4. Stagnating consumer spending and rising unemployment
rate in May in U.S.
- Consumer spending and employment rates unexpectedly halted
in May 2011. Unemployment rates edged up in June again.
5. Democratic and Republican wrangling over
debt-reduction plan adding to uncertainty in U.S.
Commodity & Emerging Market Demand Will Help Mining
Earlier this month Caterpillar completed acquisition of
Bucyrus, which is a major mining equipment manufacturer.
Moreover, growth in the global economy is causing continued demand
for commodities, resulting in commodity price increases. This is
positive for mining and will lead to increased demand for mining
machinery. This will lead Caterpillar to increase its market
share in machinery sales and raise its sales and revenue outlook
We expect Caterpillar's machinery sales to continue growing due
to continued growth in construction activity in the developing
world and improvements in machine fleets in the developed world.
But we expect that the year-on-year rate of growth this quarter to
be lower than that experienced last quarter due to some of the
macro challenges mentioned above.
See our complete analysis for Caterpillar