On Jun 7, we upgraded our recommendation on Caterpillar
Inc. ( CAT
) from Underperform to Neutral. The upgradation for this leading
manufacturer of construction and mining equipment is based on
expected benefits from the resolution of its issues related to ERA
buy, inventory adjustments nearing completion, resumption of stock
repurchases offset by negatives - trimmed guidance, declining
backlog and negative impact of the European debt crisis.CATERPILLAR INC (CAT): Free Stock Analysis
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Even though Caterpillar's sales declined 9% in April, it improved
from the 13% dip in February and 11% drop in March. With a 28%
jump, Latin America was the only bright spot during the month.
Demand for construction and infrastructure projects spurred
equipment demand in Brazil as it prepares for the 2014 World Cup
and 2016 Olympic Games.
Caterpillar has announced the resolution of its outstanding issues
with Mining Machinery Limited regarding its acquisition of ERA, and
its subsidiary Siwei. As per the agreement, Caterpillar's
obligation of $164.5 million for the acquisition has been slashed
by $135 million. In exchange, Caterpillar has agreed to end any
litigation targeting ERA's former directors or auditors related to
the alleged accounting misconduct discovered in January. The
company also incurred a charge of approximately $580 million (87
cents per share) in the fourth quarter 2012 results.
The settlement will help management better concentrate on the
company's operations and will help Caterpillar realize the targeted
benefits from this acquisition. The Siwei acquisition is expected
to expand Caterpillar's role as a leading equipment and solutions
provider for the Chinese coal mining industry.
Caterpillar has been making progress on its inventory reduction
efforts to better align supply with demand. The inventory
adjustments have almost run their course. Even though the company
anticipates some additional inventory reduction in 2013, it is
expected to be less than the reductions in past two quarters. The
company is thus planning to increase production in the second
quarter of 2013 when compared with the first quarter of 2013.
Caterpillar announced the resumption of stock repurchases in the
first quarter. The company last repurchased stock in 2008, after
which $3.8 billion remained under the authorized program. The
company expects to repurchase about $1 billion in the second
quarter, providing support for the stock.
On the flipside, citing lower mining-related sales, Caterpillar
has trimmed its sales outlook to a range of $57 to $61 billion from
the previous $60 to $68 billion. Caterpillar now expects to earn
$7.00 per share in 2013, down from the earlier projection of
earnings between $7.00 and $9.00 per share.
At the end of the first quarter of 2013, the backlog was $20.4
billion, a significant decline year over year due to a reduction in
mining-related products within Resource Industries. Caterpillar
will need additional orders during the year to meet its
The lingering economic uncertainty in Europe and the slowdown in
China's economic growth will continue to be the headwinds for
Caterpillar moving forward.
Other Stocks to Consider
Other stocks in the industrial products sector with a favorable
Zacks Rank are Kubota Corporation ( KUB ) with a Zacks Rank
#1 (Strong Buy), and H&E Equipment Services
Inc. ( HEES ) and CNH
Global NV ( CNH ) that carry Zacks
Rank #2 (Buy).