Caterpillar Earnings Preview: What We're Watching on Friday

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Caterpillar ( CAT ) 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. ( DE ), Komatsu (TYO:6301), Terex ( TEX ), Hitachi Construction Machinery (TYO:6305), Cummins ( CMI ), GE Energy ( GE ), 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 economic challenges.

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 restructuring.

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 Machinery Sales

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 for 2011.

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



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 , Investing Ideas , Stocks , US Markets

Referenced Stocks: CAT , CMI , DE , GE , TEX

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