Caterpillar is buoyed by strong global demand

Resource and construction industries are the primary growth drivers for the heavy machinery maker.

By Trefis Feb 2, 2012 2:29PM
Image: Construction (© Photodisc Green/Getty Images)Caterpillar (CAT) recorded the highest quarterly sales in its history and took profitability to new heights in its recent earnings announcement. For this quarter, Caterpillar revenue stood at $17.24 billion, up 35% from $12.81 billion a year earlier.

The sales were positively affected by the company's acquisitions,  which accounted for more than $1.5 billion in sales. Operating profits also increased from $1.29 billion in the last year quarter to $1.96 billion in this quarter, up by 52%. This could have been even higher but was offset by higher manufacturing costs and foreign currency fluctuations.

Caterpillar, a major manufacturer of construction machinery and mining equipment,  competes with other industrial majors like CNH Global NV (CNH), Komatsu and Volvo AB.

We currently have a Trefis price estimate of $100 for Caterpillar's Stock, which is 11% below the current market price. We are in the process of updating our estimates post earnings. See our full analysis of the Caterpillar stock here.

Resource and construction industries were the primary growth engine for Caterpillar. While growth in global economies heightened the demand for commodities, high prices ensured that they remained an attractive option for investors. This helped drive Caterpillar's mining business.

Sales from the resource industry stood at $5.07 billion for Caterpillar. This was supported largely by the Bucyrus acquisition, which recorded strong growth in shipment volumes this quarter. Profits from the industry stood at $997 million, $146 million of which came from the Bucyrus acquisition.

Construction was helped by developing markets where building activity continues to pick up. Caterpillar sales were also boosted by customers upgrading machine fleets by replacing older equipment and dealers refreshing equipment in their rental fleets. Sales for Caterpillar from the construction industry reached $5.36 billion. This increase in sales was more or less spread among all geographical regions and resulted from volume growth in newly launched products. Profit from the construction industry increased from $287 million in the fourth quarter of 2010 to $534 million this quarter.

Caterpillar Share of Global Machinery Market

Going forward, the company expects U.S. construction spending to pick up from current levels and is forecasting housing starts of around 700,000 units in 2012, compared to about 600,000 in 2011. Caterpillar also expects considerable business to come from rebuilding activities in Japan after the tsunami destruction. The mining market is expected to remain buoyant as the high prices of commodities should attract considerable investment. Caterpillar also anticipates sales of new machines for construction in developed countries will improve as customers continue to rebuild fleets in 2012. High fleet age and low fleet inventories should cause dealers to continue to upgrade world fleets.

Revenue from Caterpillar's financials business reached $752 million, up 4% from the previous year quarter. This has been mainly attributed to the increase in average earning assets, a favorable change that occurred due to returned or repossessed equipment, and higher net revenues. However, this could have been even higher had it not been for the negative impact from lower interest rates on new and existing finance receivables. Financial Products' profit was $134 million in this quarter, up from $105 million in the fourth quarter of the previous year.

Caterpillar Loans and Equipment Leases
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