Caterpillar Guilty of False Rail Repairs to Lift Revenues

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Per a Wall Street Journal report, a subsidiary of Caterpillar Inc.CAT has pleaded guilty to cheating customers with needless repairs in order to boost repair revenues. The subsidiary, United Industries LLC, part of Caterpillar's Progress Rail Services unit, has to pay a criminal fine of $5 million and $20 million in restitution.

United Industries' main role was examining parts of railcars to ascertain whether repairs were required. Per another Wall Street Journal report which came out three years ago, United Industries supervisors had instructed staffers to destroy brake parts with hammers, ruin wheels with chisels, and loosen handles. Employees would improperly remove functioning parts located on the railcars and replace them with new or reconditioned parts, even though the parts being replaced did not need replacement.

Subsequently, employees tossed parts into the Port of Long Beach harbor to avoid the eyes of inspectors. These damaged parts were eventually discovered by Port police divers on the ocean floor. Caterpillar had first disclosed the criminal investigation to shareholders in November 2013. The case has dragged on for years due to the complexity and calculation of fines.

Caterpillar, Inc. Price

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

Caterpillar entered a guilty plea in U.S. District Court for the Central District of California. The case centered around unnecessary repairs to rail cars owned by TTX Co., Greenbrier Co., and the Pacer International Unit of XPO Logistics Inc. XPO . These three companies will split the fine.

Meanwhile, Caterpillar has taken corrective action against the employees involved in this matter. The company noted that it had not discovered any safety issues in connection with the case.

Though the fine of $25 million is a small amount to the mining and construction equipment behemoth which has a market capitalization of $85.6 billion, it is a blow to reputation. Year to date, Caterpillar's shares have gained 55.1%, falling behind the industry' s growth of 58.5%.

So far this year, Caterpillar shares have gained on the back of its upbeat performance so far and upbeat outlook. Owing to encouraging order rates, upbeat economic indicators and an increasing backlog, the company hiked revenue guidance to the range of $44 billion from the prior range of $42-$44 billion. It now projects earnings per share of $6.25 compared with previous guidance of $5.00 per share. The mid-point of the revenues and earnings guidance reflect year-over-year growth of 14% and 83%, respectively.

Caterpillar currently flaunts a Zacks Rank #1 (Strong Buy).

Other Stocks to Consider

Some other top-ranked stocks in the sector include, Terex Corporation TEX and H&E Equipment Services, Inc. HEES . Both the stocks sport a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Terex has expected long-term growth rate of 11.25%. Its shares have rallied 47%, year to date.

H&E Equipment Services has expected long-term growth rate of 15.55%. Its shares have surged 60%, year to date.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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