) topped Dow Jones last week with a gain of 8.98% while major
Wal-Mart Stores Inc.
) suffered declines on disappointing earnings and weakened
forecasts. The index had an unfortunate week losing 1.1% over the
five days of trade.
It was an eventful and positive week for the mining machinery
giant starting with a 6% increase in its share price on Monday,
Jan 27 on the back of a fourth quarter earnings beat. The share
price further found support as news of renewed investments in
Northern Ireland and share repurchases came in. Caterpillar
shares closed at $93.91 on Friday after touching a high of $94.69
during intraday trading.
It has almost been a year since the company hit the $90+ mark.
Such elevated share prices were last seen in Feb 2013.
Caterpillar came across a rough patch for most of last year with
struggling growth rates. Though the turnaround in Caterpillar
shares is encouraging, it remains to be seen whether the company
can sustain this momentum, improving upon its previous 52-week
high of $99.10 attained on Feb 5, 2013.
Factors Leading to the Turnaround
Rise in Q4 Earnings after 3 Quarters of Decline
Despite reporting a 10% decline in its fourth quarter sales to
$14.4 billion, Caterpillar delivered a 48% rise in its earnings
to $1.54 per share. The final quarter of the year broke the jinx
of negative earnings surprises - four in a row - and also marked
the first year-over-year earnings improvement in 2013.
In spite of challenging macroeconomic conditions and reduced
demand for its mining equipment, cost reduction was the key to
Caterpillar's success in Q4. Earnings in the first three quarters
of 2013 were plagued by lower mining demand.
Performance Betters the Peer
Caterpillar's earnings beat was made sweeter by
Joy Global Inc.'s
) debacle in the reported quarter. Joy Global's adjusted earnings
of $1.11 per share plummeted 47% from the year-ago figure of
$2.10 per share. Earnings however came in line with the Zacks
Consensus Estimate. Depleting backlogs and a decline in orders
pulled back results.
Caterpillar Committed to Boost Shareholder
Despite a tumultuous year, Caterpillar continued to deliver
strong cash flow and reward shareholders. The company ended 2013
with cash and short-term investments of $6.1 billion, up from
$5.5 billion at 2012 end.
The debt-to-capital ratio at Machinery and Power System
(M&PS) improved substantially to 29.7% as of Dec 31, 2013,
compared with 37.4% as of Dec 31, 2012. This was the lowest
debt-to-capital ratio in over 25 years. Operating cash flow at
M&PS was a record $9 billion in 2013, up from $4.2 billion in
2012, thanks to the $2.9 billion inventory reduction during the
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On Thursday, the company announced its intention to purchase
approximately $1.7 billion of its common stock under an
accelerated stock repurchase transaction. With this the company
will complete its previous $7.5 billion repurchase
Caterpillar's board of directors had authorized the repurchase of
$7.5 billion of its common stock in Feb 2007. Until 2008,
Caterpillar had spent $3.8 billion of the authorization and no
shares were repurchased since then. In Dec 2011 this program was
extended through Dec 2015. Following its first-quarter 2013
earnings, Caterpillar decided to resume the program, given its
balance sheet strength and positive cash flow.
Subsequently, Caterpillar repurchased $2 billion of common stock
in the balance of 2013. At the fourth quarter conference call,
the company announced that its board of directors approved a
fresh $10 billion stock repurchase program that will expire on
Dec 31, 2018.
If that was not heartening enough, Caterpillar hiked its
quarterly dividend by 15% to 60 cents per share in 2013, marking
the highest percentage increase in dividend since the financial
crisis of 2008. These repurchases and dividend hikes affirm its
commitment to deliver superior returns to its shareholders.
Last week, Caterpillar also divulged its plans to invest $9
million (£5.4m) to expand its truck parts manufacturing operation
in Northern Ireland. This will help generate up to 100 jobs at
its plant in Larne, County Antrim. In Sep 2012, Caterpillar's
decision to shift production of a line of diesel generators from
its FG Wilson subsidiary, from Northern Ireland to China, had
cost 760 jobs. A slowdown in global demand for Caterpillar's
generator sets led to the job cuts.
Given the slowdown in demand, the mining and equipment behemoth
had reined in its investment and acquisition activities in 2013.
If the current investment in Ireland is any sign, Caterpillar
might well loosen its purse strings going forward, encouraged by
a recovering world economy.
A Brighter 2014
Caterpillar expects revenues in 2014 to be flat with 2013 levels,
up or down 5%. Excluding restructuring costs, earnings per share
are expected at $5.85. Construction Industries and Power Systems
are expected to deliver sales growth on the heels of better
economic growth. However, sales in Resource Industries will
continue to be challenging, as mining companies keep cutting
their pockets with lower capital expenditures for 2014.
Caterpillar was hurt by slowing demand and inventory correction
as a result of overproduction compared to demand in 2013. While
these inventory reductions were a significant sales and
production headwind in 2013, their impact on the company's sales
is now largely over.
The company might finally be seeing light at the end a dark
tunnel. It is all set to reap the benefits of its cost reduction
activities, namely, shifting production between certain
facilities, rationalization of its smaller facilities and
workforce reductions. Also, improving economic conditions,
especially in China, and recovery in the construction sector
could be catalysts for Caterpillar.
Peoria, IL-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
currently retains a Zacks Rank #3 (Hold).