Heavy equipment manufacturer and Dow-30 component Caterpillar (CAT – Free Caterpillar Stock Report) has reported better-than-anticipated results to start 2014, sending this equity to a new 52-week high. First-quarter sales, at $13.24 billion, were essentially even with the year-earlier tally, with momentum in the Construction Industries and Energy & Transportation end markets compensating for sluggishness in Mining equipment (part of the Resource Industries division). Inclement weather in a few key markets was also a factor in depressed orders from the mining realm.
Despite business and economic uncertainties globally, and a secular downturn in the company's bread-and-butter mining business, a tight rein on expenses buoyed Caterpillar's bottom line. Excluding restructuring costs, this Illinois-based entity reported share earnings of $1.61, which eclipsed our $1.22 estimate and the year-earlier profit of $1.31 a share.
These healthy results were a surprise, given the mixed dealer data that have been released of late. Despite prospects for improved economic growth and continued strong mine production in 2014, the company expects Resource Industries' sales to be lower than previously anticipated. Segment sales are now expected to be down about 20% from 2013. (Management's previous outlook expected a decline of about 10%.)
Dealer statistics showed a worsening deterioration in global demand for Caterpillar mining equipment. In particular, the manufacturing company noted that sales of earth-moving equipment fell 12% year over year in March, after declining 8% in both January and February. However, purchases by customers in the mining space plummeted 46% in March, following 37% declines in both January and February. The falloff in orders was most notable in the Asia-Pacific region, previously an engine of growth, and in South America, where policies by newly-elected governments have made mining prohibitively expensive.
In contrast, sales of construction equipment was up nearly 10% during the March interim, with business from Energy and transportation markets up 7%. Caterpillar said it expects orders to the global construction industry to increase 10% from 2013, up from a previously anticipated rise of about 5%.
In an effort to stem the effect of capital-spending reductions by miners around the world, management embarked on a massive cost-cutting program and initiated a $10 billion stock-buyback authorization in 2013. Over the past year, the company has announced the closure of various facilities in the United States, as well as one each in Canada, Belgium, and France. These factors and the likelihood of an eventual turnaround have led to improved investor sentiment. In fact, CAT short interest has fallen in recent months, suggesting Wall Street is becoming less bearish on this equity. Moreover, Caterpillar shares have outperformed those of most competitors (+15%) year to date, as well as the S&P 500 Index and the Dow Jones Industrial Average.
The company's sales outlook for 2014 remains unchanged at $56.0 billion. However, there are a range of macroeconomic and geopolitical uncertainties that could prove detrimental for global GDP and thus, weigh on demand for Caterpillar's products. Given the solid performance in the March term, this manufacturer has increased its 2014 profit expectations by $0.25, to $ 6.10 a share, excluding restructuring costs. Our top- and bottom-line estimates are currently $56.0 billion and $6.05, respectively.
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 2012.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.