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Dow-30 Earnings: Caterpillar Inc. - First Quarter 2012
Dow-30 component Caterpillar (CAT - Free Caterpillar Stock Report), the world's biggest producer of heavy equipment, started the year with record quarterly profits during the March term. The top line advanced 23% from the year-earlier period, to $15.98 billion, driven by sales of both new products and aftermarket parts. Although that figure fell short of our $16.19 billion estimate, expectations were perhaps a little too high after the company closed out 2011 with a record backlog of $29.8 billion. Investors seemed to focus on that aspect of the earnings release, with Caterpillar shares trading modestly lower.
Leading the way was the Resource Industries division, where rising worldwide demand for commodities supported sales of mining and quarry machines. A focus on execution and cost containment, concurrent with numerous initiatives to increase production and expand capacity, lifted share earnings 29% in the first quarter, to $2.37. This comfortably exceeded our $2.10 forecast.
Recent acquisitions are set to play a key role this year, with two purchases, in particular, standing out: Bucyrus International, a manufacturer of equipment for the surface and underground mining industries; and MWM GmbH, a German maker of environmentally friendly systems for energy production. Together, these two additions may contribute up to $6.0 billion to the top line in 2012, and ought to be accretive to share earnings right away. More recently, Caterpillar acquired China-based ERA Mining Machinery Limited, improving the company's prospects in that booming market.
Caterpillar's strategy remains focused on product development, capacity expansion, and the utilization of a widespread dealer network. Together, this appears to be a recipe for another good year in 2012. The company has increased its share-profit outlook for the year ahead by a quarter, to $9.50, while maintaining its sales target of $68 billion-$72 billion. We believe Caterpillar's bottom-line forecast is still a bit conservative. Indeed, we've raised our full-year earnings estimate by $0.35, to $9.75 a share.
Over the long term, this Illinois-based company appears to have a taste for South America and Asia, where demand for equipment to install power lines and bulldozers for infrastructure remains vibrant. China and Brazil took steps in 2011 to moderate economic growth as a means to bring inflation under control. However, with their respective microeconomic concerns dissipating, and government policies that promote growth back on the table, demand in both markets should remain strong in the years ahead.
China's engineering industry is purported to be on pace to spend more than $140 billion by 2015, as policies focused on water conservation and affordable housing loom large. In comparison, nearly $70 billion in sales was reported in the world's most populous country in 2011. Concurrently, Japan's massive rebuilding effort in the wake of the natural disasters that devastated that nation in early 2011 suggests a growing need for heavy equipment.
Activity in Brazil, which possesses a large natural resource base and a flourishing local manufacturing capability, ought to accelerate as the government works to complete various projects in anticipation of two world events: Brazil will host the 2014 FIFA World Cup and 2016 Summer Olympic Games.
Meantime, these shares have about average price appreciation potential to mid-decade, and continue to offer a modest dividend yield backed by a secure payout.
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 2011.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.