Caterpillar results boost sector

The company raised its guidance on strong earnings, showing confidence about the global economy next year.

By Jim J. Jubak Oct 24, 2011 6:17PM
Caterpillar (CAT) announced third-quarter earnings Monday morning of $1.71 a share, a positive earnings surprise of 7 cents.

As you'd expect, Caterpillar shares were up big -- closing up 5% to $91.77 -- and as you'd expect, Caterpillar's positive surprise sent shares of other companies in the construction and mining-equipment sector soaring.

And the more exposure a company has to mining -- the strongest part of Caterpillar's business this quarter -- the bigger the gain:
  • Deere (DE), which has more exposure to farm than construction equipment, is up 3.26%.
  • Joy Global (JOYG), which is more of a pure play on mining than Caterpillar, is up 5.68%.
  • And Titan International (TWI), which has big exposure to mining and has been beaten down more than either Caterpillar or Joy Global, is up 11.64%.
(Deere and Joy Global are both members of my Jubak Picks 50 long-term portfolio. Titan International is a member of my 12-18 month Jubak’s Picks portfolio.)

It also probably hasn’t hurt Titan International that the company reports earnings on Wednesday after the bell. That’s close enough to Caterpillar’s report date to make the momentum players jump on board in search of another earnings surprise. (Joy Global, by contrast, doesn’t report earnings again until Dec. 14.)

Let’s not move on too quickly from Caterpillar’s earnings, though. Excluding the effects of the company’s acquisition of mining-equipment maker Bucyrus International in July, revenue was up 31% year to year and earnings climbed by 58%.

Including the effects of that deal adds to revenue -- revenue grew by 41% -- but cuts into earnings growth (earnings grew by 40%), because Bucyrus sales, in general, carry a lower profit margin than do Caterpillar’s sales.

But the acquisition of Bucyrus was clearly a transformative event for Caterpillar’s resource industries unit. Third-quarter sales for the unit doubled to $4.6 billion, with about half of that increase coming from Bucyrus.

Caterpillar raised its guidance for the full 2011 year to $6.75 in earnings per share, from its prior $6.25 to $6.75 estimate. For 2012, the company’s guidance for $63.8 to $69.6 billion in revenue pretty much bracketed Wall Street’s projection of $65.74 billion.

The one glitch in the company’s performance turns out to be not a glitch at all when you dig a little bit. Operating profit margin was essentially flat year to year and sequentially from the second quarter. But that was a result of the dilution and costs of the Bucyrus and other acquisitions in the period. Excluding those effects, Caterpillar’s incremental margins climbed to 22% from a very weak 18% in the second quarter.
Maybe the most important aspect of the company’s report, though -- certainly for Caterpillar’s fellow sector members -- was its confidence about the global economy in 2012. The company said it saw the global economy recovering in 2012, with the U.S. economy expanding by 2.5%, China by 9%, and the overall global economy growing by 3.5%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Deere, Joy Global, and Titan International as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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