We are maintaining our Neutral recommendation on
) based on margin headwinds, negative impact of the European debt
crisis and a slowing Chinese economy despite a stellar second
quarter. We currently have a Zacks #3 Rank (short-term Hold rating)
on the stock.
Caterpillar reported record second quarter both in terms of
earnings per share (EPS) and revenues. EPS in the quarter was
$2.54, a 67% increase from $1.52 in the prior-year quarter, and way
ahead of the Zacks Consensus Estimate of $2.26. Revenues surged 22%
to $17.37 billion in the quarter, outpacing the Zacks Consensus
Estimate of $16.97 billion. Volumes were up for both new equipment
and aftermarket parts as well as across all geographic regions,
except China and Europe.
Caterpillar lowered the upper end of its previous sales guidance
range by $2 million. The company now expects sales to be in the
range of $68 to $70 billion compared with the prior guidance of $68
to $72 billion. The company has now factored in weaker economic
conditions prevailing across the globe and approximately $1 billion
in negative currency impacts. The company has, however, upped the
EPS expectation from $9.50 to $9.60 on better operating
performance, partially offset by a higher tax rate.
The Caterpillar-Bucyrus merger has positioned Caterpillar as the
leading global mining original equipment manufacturer. Caterpillar
boasts the broadest product line in the mining industry with
unmatched product support. The second quarter of 2012 was the best
quarter ever for the company in terms of sales of mining products.
The company has a substantial order backlog with lead times for
several large mining truck models through 2014.
The company is persistently adding production capacity for a number
of mining products. We believe that the company's top line will
continue to grow on the back of increasing demand for construction
and mining equipment. Caterpillar plans to open new facilities and
expand existing operations, particularly in the emerging markets,
which will boost its long-term potential.
On the flipside, margins at Caterpillar may come under pressure
from various quarters. These include rise in period manufacturing
costs; higher SG&A expenses; R&D expenses, primarily
related to implementation of emission requirements; higher
depreciation expense arising from increased capital spending,
higher taxes, incremental costs pertaining to Bucyrus inventory
step-up and acquisition and integration expenses, including
severance costs and other integration-related activities.
In addition to the European debt crisis, signs of a slowdown in
China have triggered concerns. China has slashed its 2012 growth
target to an eight-year low of 7.5%. A slowing Chinese economy will
have a detrimental effect on infrastructure and construction
spending with an immediate impact on Caterpillar's sales in the
Peoria, Illinois-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 operates two
divisions - Machinery and Power Systems and Financial Products.
Caterpillar competes with the likes of
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