Caterpillar Inc. (CAT) has recently been awarded a six-year fixed price contract by the Defense Logistics Agency for providing commercial construction equipment. The contract value, with economic price adjustment, is set at $776 million. Caterpillar outbid 14 other bidders for the contract.
The equipment will be used in certain U.S. states (North Carolina, Illinois, Georgia, Minnesota, Arkansas, Iowa, South Carolina, Indiana) besides England, France, Belgium, Japan, Italy and Ireland. The Army, Navy, Air Force, Marine Corps and federal civilian agencies will be using the equipment. The work is to be performed at Cat’s plant in Mossville, Illinois with completion scheduled by May 23, 2017.
Caterpillar’s order backlog has steadily increased throughout the quarter and is at a new high, which holds promise for the year ahead. Backlog stood at $30.7 billion at the end of the first quarter, 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 flip side, besides 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.
We maintain our Neutral recommendation on Caterpillar 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 #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over 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 (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).
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