Caterpillar bulldozes earnings

Caterpillar earnings show that global growth is still intact.

By Benzinga Oct 24, 2011 5:30PM

By Jonathan Chen, Benzinga Staff Writer


After missing Wall Street expectations last quarter, Caterpillar (CAT) reported a third quarter Monday that bulldozed past estimates.


The Illinois-based maker of mining and earth-moving equipment also raised its full year guidance, sending shares up 5% to close at $91.77.


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Caterpillar reported a profit of $1.71 per share on $15.72 billion in revenue -- far greater than the $1.55-per-share profit on $15.03 billion in revenue that Wall Street analysts had been expecting. Excluding one-time items, Caterpillar's earnings came in at $1.93 per share.


Caterpillar guided full year earnings to $6.75 per share, higher than analyst estimates of $6.67 per share.


Chief executive Doug Oberhelman said the quarter was the best one for sales in company history, with order backlog at an all-time high. "I am pleased with how we're performing and optimistic about demand for our products, and that is why we are moving forward with needed investment in our business to support our long-term growth opportunities," he added.


Oberhelman said 2012 is shaping up to be an even better year than 2011, thanks in part to Caterpillar's acquisition earlier this year of mining-equipment maker Bucyrus.


"We are continuing to increase production levels for many of our products and expect that supply will remain tight in 2012," he added. "Of course, we realize the world faces economic uncertainty and risk. A key part of our planning process is to make sure we're prepared if the situation turns negative."


To that end, he said, each of the company's business has prepared "trough" plans to help the company act faster in unexpected situations.


Analysts at Gabelli & Co. were positive on the quarter, noting that the company saw strong cash flow from machinery and power groups. Construction was strong on the equipment side, boosted by rental companies refreshing fleets, the analysts said, and commodity prices remain high enough to keep mining equipment demand high.


Caterpillar has said that China is still a major growth driver for the company, but that competition is increasing. Chinese economic growth slowed to 9.1% in the latest quarter, as the People's Bank of China tried to engineer a soft landing.


Gross margin did fall in the latest quarter, as it did in the previous quarter, but company predicted a drop as it includes Bucyrus' products into its operating results.


What is important is that Caterpillar is not seeing any signs of a major slowdown in the world's economy, which is a good thing. Companies like Caterpillar, Joy Global (JOYG), Komatsu, and to a lesser extent, Deere & Co. (DE) are important indicators of global economic health. If infrastructure growth is strong across the globe, that is a good indicator that global growth is not going to experience a repeat of the 2008 financial crisis.


Shares of Caterpillar trade at less than 11 times projected 2012 earnings, and sport a 2.1% dividend yield.


Caterpillar had a rough second quarter, and went back into the cocoon, losing 5% during the second quarter, and almost 18% from March 31, 2011 to today. After this report, it looks like Oberhelman and team have finally gotten back on track, and have been able to bust out of the cocoon and turn into a butterfly.


ACTION ITEMS:

Bullish:
Traders who believe that Caterpillar's strong results bode well for other mining and equipment makers might want to consider the following trades:

  • Consider names like Komatsu, Deere (DE), and CNH Global (CNH).
  • Caterpillar shares are also cheap if you expect the company to make its 2012 earnings target, trading at less than 11 times projected earnings.

Bearish:
Traders who believe that global growth is going to come to a halt may consider alternate positions:

  • If China is not able to engineer a soft landing, and Europe does not solve its problems, Caterpillar sales could slow drastically, despite having buffers in place. Traders may want to short shares of Caterpillar.

Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security. 


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