We are maintaining our Neutral recommendation on
Caterpillar Inc.
(
CAT
) based on a muted fourth quarter outlook, reduced fiscal 2012
guidance, negative impact of the European debt crisis and a
slowing Chinese economy. We currently have a Zacks #3 Rank
(short-term Hold rating) on the stock.
Caterpillar reported record third quarter both in terms of
earnings per share (EPS) and revenues. EPS in the quarter was
$2.54, a 49% increase from $1.71 in the prior-year quarter, and
way ahead of the Zacks Consensus Estimate of $2.21. Revenues
upped 5% to $16.4 billion in the quarter, but fell short of the
Zacks Consensus Estimate of $16.7 billion.
Caterpillar has lowered its sales guidance to $66 billion from
the prior guidance range of $68 billion to $70 billion due to
weaker economic conditions across the globe. The company has also
trimmed its EPS expectation to a range of $9.00 to $9.25 from the
previous outlook of $9.60.
The outlook, even though lowered from the prior guidance, if
achieved would mark the highest sales and profit in Caterpillar's
history, exceeding the record levels last year. For fiscal 2013,
sales are expected to be down 5% to up 5% from 2012.
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 construction sector has lately been weak and thereby
affected Caterpillar's earnings. However, the recent figures
suggest a turnaround in the non-residential as well as
residential construction sector.
According to the American Institute of Architects, after
languishing in the negative territory for five consecutive
months, the architecture billing index (ABI) climbed back into
the positive territory with a score of 50.2 in August, which
further improved to 51.6 in September, the highest in nearly two
years. In September, both housing starts and building permits
were record high in four years.
These figures are reflective of the fact that U.S. residential
construction is finally stabilizing and is on the road to a much
awaited recovery. This will provide a boost to Caterpillar's
earnings.
The company had been persistently adding production capacity
for a number of mining products. Even though fluctuations in the
emerging economies are expected to negatively impact near-term
results, the expansion should provide long-term growth
opportunities. Growing economies promote the expansion of roads,
new buildings and reliable energy, which drives the demand for
machinery
Caterpillar's fourth quarter results is expected be lower than
the third quarter as the company will cut down production to
counteract inventory increases and backlog depletion.
Furthermore, sales volume is expected to be lower, and the fourth
quarter typically has seasonally higher costs.
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 near term.
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
CNH Global NV
(
CNH
),
Komatsu Ltd.
(
KMTUY
) and
Volvo AB
(
VOLVY
).
CATERPILLAR INC (CAT): Free Stock Analysis
Report
CNH GLOBAL NV (CNH): Free Stock Analysis
Report
(KMTUY): ETF Research Reports
VOLVO AB ADR B (VOLVY): Free Stock Analysis
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