Loading...
 

Shares of Dow-30 component Caterpillar (CATFree Caterpillar Stock Report) are up in value after the heavy equipment manufacturer performed surprisingly well in the first quarter. Though sales of $12.70 billion fell roughly 4% over the year-earlier level, this eclipsed our $12.37 billion estimate. Higher prices on certain machines mitigated an unfavorable currency impact and lower sales volume.

Geographically, business cooled in all regions except North America. Asia/Pacific, which had been a source of growth in recent years, has turned into a sore spot for Caterpillar, as lower end-user demand for construction equipment cast a large shadow over operations. Looking within, sales in the Construction Industries and Resource Industries divisions fell, while remaining flat within the Energy & Transportation segment.

As much as the top-line beat helped, a focus on cost controls and leaner manufacturing base were more instrumental in the solid performance. A smaller work force and the aforementioned improved price realizations overcame increased SG&A and R&D expenses. Taking these factors together, earnings of $1.86 a share came in well above both our forecast and the year-earlier tally of $1.34 and $1.61, respectively.

Management's outlook for 2015 sales remains the same at roughly $50 billion. But, it has lifted the profit view from $4.75 to $5.00 a share. However, the manufacturer acknowledged headwinds and uncertainty. In fact, the company will be hard-pressed to maintain momentum. Caterpillar appears to still face challenges: a slowdown in China's economic growth and the prolonged slide in a plethora of commodities. The slump for Caterpillar started a few years ago, as prices of various resources began to slide from record highs. Much to the chagrin of this Illinois-based company, mining entities globally turned the tap off on spending. More recently, oil's earlier retracement has made matters worse, as explorers and producers slash their capital spending budgets. Just when conditions could not appear to get any worse came a firming U.S. dollar. This should prove detrimental for Caterpillar, given a substantial portion of sales is generated in international markets.

The manufacturer's outlook is based on estimated global GDP growth of 2.7% in 2015, compared to 2.6% last year. Despite CAT's view of modest gains, uncertainty in nearly all corners of the world looms large. There is conflict and/or unrest in Eastern Europe, Africa, and the Middle East. In China, government reforms are slowing economic growth, while the U.S. faces the likelihood of possible changes to monetary policy later this year, which has the potential to be a drag.

According to guidance, sales and share net in the remaining quarters of this year will be lower than the levels reached in the recent period. Circumstances will probably be exacerbated by weak fundamentals in the energy markets, with orders for Caterpillar's portfolio of oil applications probably falling. What's more, costs are typically lower during the early months of the year. Nevertheless, the better-than-anticipated start to 2015 has led us to increase our full-year share-net estimate by $0.20, to $5.20.

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 account for about 67% of the company’s total.

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