We maintain our Neutral recommendation on Caterpillar Inc. (CAT) due to the recent loss of momentum in sales growth, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slightly upward pressure on stock over the near term.
Caterpillar has kickstarted 2012 by posting a record EPS of $2.37 in the first quarter. For fiscal 2012, Caterpillar’s sales guidance is in the range of $68 billion to $72 billion and has an EPS guidance of $9.50. This, if realized, would mark a record in Caterpillar’s history, even ahead of last year’s ground-breaking results.
The Caterpillar-Bucyrus merger will position Caterpillar as the leading global mining original equipment manufacturer. The combined product portfolio will dwarf Joy Global Inc. (JOY), the only U.S.-based manufacturer of surface and underground mining equipment.
Caterpillar expects Bucyrus to be accretive to its operating profit by at least $450 million. Bucyrus has a wide product portfolio and will complement Caterpillar’s existing mining product line. The Bucyrus acquisition will also help Caterpillar gain a strong foothold in China and India, both of which are major mining markets.
Caterpillar’s order backlog has steadily increased throughout the quarter and is at a record high, which holds promise for the year ahead. Backlog stood at $30.7 billion, up from $29.8 billion at the end of fiscal 2011. Many products have long lead times, with some slated for 2014. This bodes well for Caterpillar's future performance.
The company is persistently adding production capacity for many of its mining products. We believe that the top line at the company 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, Caterpillar recorded machines sales growth of 18% for the three months ending on March 31, 2012, dipping further from the lowest growth rate of 30% last year and from the 21% clip recorded in February 2012.
Even though Caterpillar has seen sales ramping in the last 23 months, of late the rate of increase has been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe. Sales growth is now almost one-fourth of the highest level of 66% recorded in 2011.
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 as a result of 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 negative effect on the 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
JOY GLOBAL INC (JOY): Free Stock Analysis Report
VOLVO AB ADR B (VOLVY): Free Stock Analysis Report
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