On Jan 17, we upgraded our recommendation on
) from Underperform to Neutral. The upgrade takes into
consideration the expected benefits from cost-cutting
initiatives, increased share in the Chinese excavator market and
share repurchases, tempered by a trimmed guidance, declining
backlog, lingering effects of the European debt crisis and the
uncertainty in the non-residential construction markets.
Why the Upgrade?
Caterpillar will benefit from its continuous focus on cost
cutting. Given the challenging end markets, the company has
resorted to temporary layoffs as well as shutting down or
shifting operations. In the first three quarters of 2013,
Caterpillar effectively lowered costs by about $700 million and
reduced capital expenditures by approximately $400 million.
China excavator sales increased 21% year over year in Dec 2013 -
the third straight month of more than 20% growth. In 2013,
Caterpillar's China excavator sales increased 25%, faring much
better than the industry-wide decline of 3% while its market
share increased to 12% in China. Caterpillar is expected to
capitalize on the expanding Chinese excavator market going
Through the end of the third quarter of 2013, Caterpillar
completed the repurchase of $5.8 billion of stock, leaving $1.7
billion in the authorization. Caterpillar is generating strong
free cash flow and has room to increase its buyback
authorization, providing support to the stock. Caterpillar also
hiked its quarterly dividend by 15% to 60 cents per share in the
second quarter, marking the highest percentage increase since the
financial crisis of 2008.
On the flipside, even though sales in the fourth quarter are
expected to slightly exceed the previous quarter, earnings per
share are likely to be lower due to higher costs resulting from
seasonal spending patterns. The company also expects another
substantial decline in dealer inventories in the fourth quarter.
Caterpillar has trimmed its 2013 guidance for three quarters in a
row and now projects sales of $55 billion, down from the previous
range of $56 billion to $58 billion.
At the end of the third quarter of 2013, backlog was at $19.1
billion, down from $23.1 billion at the end of the third quarter
of 2012, mainly due to a substantial reduction in mining-related
products within Resource Industries. Caterpillar will need
additional orders to meet its 2013 guidance.
The American Institute of Architects (AIA) Architecture Billings
Index (ABI) further declined to 49.8 in Nov 2013, from 51.6 in
October and 54.3 in September. Any reading below 50 signifies a
decline in billings and this was the second reading below 50 in
the last 16 months. Furthermore, weak public construction
spending poses the most significant risk to a non-residential
recovery, particularly in light of further government spending
cuts. This makes the expected recovery in the non-residential
market highly uncertain and raises questions about Caterpillar's
Other Stocks to Consider
Caterpillar currently holds a Zacks Rank #3 (Hold). Some
better-ranked stocks in the sector include
Columbus McKinnon Corporation
). While Kubota and Columbus McKinnon hold a Zacks Rank #1
(Strong Buy), Terex carries a Zacks Rank #2 (Buy).
CATERPILLAR INC (CAT): Free Stock Analysis
COLUMBUS MCKINN (CMCO): Free Stock Analysis
KUBOTA CORP ADR (KUBTY): Get Free Report
TEREX CORP (TEX): Free Stock Analysis Report
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