CAT August Sales Unflattering

Zacks

Caterpillar Inc. (CAT) recorded machines sales growth of 13% for the three months ending August 31, 2012. Even though it has maintained a 28-month run of sales growth, the sales growth rate is poor compared to the 34% growth rate in August last year. Caterpillar shares fell 1% on the news.
 
Compared to the lowest growth rate of 30% last year, the current growth rate of 13% is indeed disappointing. So far this year, the growth rate has dipped to the below-20% range after the 27% ramp in January, and 21% in February. Caterpillar’s sales growth rate has of late been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe and in Latin America. Sales growth is now less than one-fifth of the peak level of 66% in 2011.
 
Regional Statistics                                                            
 
Region-wise, the company registered the maximum growth of 27% in Asia/Pacific followed by 24% in North America. Sales in Europe, Africa and Middle East (:EAME) were flat year over year and sales in Latin America were a dampener, recording a drop of 1%. Rest of the World (:ROW) increased 7%.
 
Asia/Pacific sales benefited from easier year-ago sales comparisons as well as hike in demand from Asian markets besides China. Of late, China's attempts to fight inflation have affected Caterpillar’s sales in the region. Caterpillar’s sales in its largest market – North America – have benefited from strong replacement demand as equipment users replace worn-out machinery and dealers replenish the equipment fleet for their rental businesses.
 
In Latin America, the growth rate is still in the red reflecting tough economic conditions, especially in Brazil. The segment posted a decline of 5%, albeit an improvement from the 13% drop in April 2012. This is way far down from the highest growth of 76% posted in February 2011 and even the lowest pace of 8% in November last year. EAME sales growth remained flat reflecting the broad economic weakness in Europe. However, it has improved somewhat from the 1% drop in July 2012.
 
In Reciprocating & Turbine Engine Retail Statistics, sales were up 3% year over year globally. Although results improved from the 1% decline in March 2012, the growth of 2% barely compares with the 14% rise recorded in May last year. After a 22% growth in January and 13% in February, the growth rate has been lingering in the single digits.
 
End Markets
 
Among the end markets, sales to the petroleum sector and transportation reported an increase of 14% and 9%, respectively. Sales to these sectors have depreciated significantly from the respective growth rates of 20% and 11% in July.
 
Electric Power posted a 3% decline, marking the sixth consecutive month of declining sales and in stark contrast to the 24% climb in January and 6% in February this year. However, the rate of decline has improved from the 19% drop experienced in March and May this year. The Industrial sector continued its string of declining sales, seven months in a row, with sales falling 16%. 
 
Second Quarter Recap, Guidance
 
Caterpillar reported a record second quarter both in terms of earnings per share (EPS) and revenues. In the quarter, EPS was $2.54, a 67% increase from $1.52 in the prior-year quarter, and way ahead of the Zacks Consensus Estimate of $2.26. Revenues soared 22% to $17.37 billion in the quarter, outpacing the Zacks Consensus Estimate of $16.97 billion. Volumes were up for both new equipment and aftermarket parts as well as across all geographic regions, except China and Europe.
 
For 2012, the company expects to record sales in a range of $68 billion to $70 billion. EPS is forecast at $9.60. The targets, if achieved, would mark the highest revenues and profit in Caterpillar’s history, exceeding last year’s record.
 
Our Take
 
The company is persistently adding production capacity for many of its mining products. We believe that the top line at the company will continue to grow on the back of increasing demand for construction and mining equipment. Caterpillar plans to open new facilities and expand existing operations, particularly in the emerging markets, which will boost its long-term potential.
 
On the flip side, besides the European debt crisis, signs of a slowdown in China have triggered concerns. A slowing Chinese economy will have a negative effect on the infrastructure and construction spending with an immediate impact on Caterpillar’s sales in the near term.
 
We maintain our Neutral recommendation on Caterpillar due to the recent loss of momentum in sales growth, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
 
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.
 
Caterpillar operates two divisions – Machinery and Power Systems (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).
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