Shares of Dow-30 component Caterpillar (CAT - Free Caterpillar Stock Report) traded notably higher after the machinery manufacturer beat expectations during the September interim. Total sales advanced 31% over the previous-year period, to roughly $14.6 billion, driven by volume gains across all geographic regions and business segments. Continuing economic growth in emerging markets buoyed the Construction Industries unit, with record machine sales across most markets. Activity in China was an exception, however, as recent government measures to tame inflation tempered demand for Caterpillar's products. Elsewhere, high levels of investments by mining companies are driving demand for equipment and parts manufactured by the Resource Industries business.

Caterpillar experienced an increase in manufacturing expenses in the interim, led by capacity expansion programs, as well as higher materials and freight costs. Nevertheless, a relatively high level of operating leverage led to share earnings of $1.93, exceeding our $1.76 estimate and the prior-year tally of $1.22.

Results excluded a nonrecurring charge of $0.22 a share due to the purchase earlier this year of Bucyrus International, a designer and manufacturer of mining equipment for the surface and mining markets.

The equipment maker's corporate strategy is focused on aggressive product development, significant capacity expansion, and utilization of a widespread dealer network. Taken together, we expect the Illinois-based manufacturer to generate sales of $56.0 billion in 2011.

New equipment and after-market parts are both on pace to notch gains, with the former especially strong. While there have been indications that the global economy and commodity prices have moderated recently, we expect year-over-year advances on both fronts. Moreover, this environment is proving to be conducive for Caterpillar, with construction and mining activity forging ahead. Momentum remains particularly strong in emerging markets. In developed countries, customers are upgrading machine fleets and replacing older equipment despite a somewhat weak level of construction activity.

Though manufacturing costs and SG&A expenses are likely to increase from year-earlier levels, higher sales volume and better price realization should lead to a more-than-commensurate bottom-line gain. In all, we expect share net to rise 75% from 2010's depressed figure, to $7.25.

While Caterpillar dealers continue to report healthy year-over-year growth in demand for new and rental equipment, sequential trends appear to be slowing down a bit. Moreover, order rates suggest that the aforementioned replacement of products in developed countries (primarily in Europe) may be moderating. In 2012, we look for sales and earnings to each improve about 20% from our 2011 forecasts, to $68.0 billion and $8.70 a share, respectively.

Prospects to mid-decade appear bright, with emerging markets serving as a primary catalyst. Brazil, in particular, ought to be a standout. Caterpillar has secured considerable market share in South America's biggest economy, which possesses a large natural resource base and flourishing local manufacturing capability. In fact, the company's manufacturing facility in Piracicaba, Brazil, is its largest worldwide. In the same vein, the country should build on its recent momentum thanks to substantial investments (public and private) in its energy and mining bases. Too, Brazil will host the 2014 World Cup of soccer and the 2016 Summer Olympics, two considerable events that ought to boost demand for construction equipment.

Furthermore, despite some near-term challenges, we expect economic activity in the U.S. and Europe to be well on the road to recovery by 2014-2016. All told, share earnings of $14.50-$15.00 should be achievable over that time frame.

About The Company: Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales made up about 68% of the company’s total in 2010.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.