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Caterpillar's (CAT) May Sales Rise 8%: Good Times Ahead?

Zacks Equity Research

Caterpillar Inc. CAT reported 8% rise in sales in May, a pick up from 1% growth witnessed in April and March thanks to continuing improvement in Asia Pacific, particularly in Resource Industries. This is a positive development for the ailing mining and construction equipment behemoth which had been going through a rough patch with sales declining for an unprecedented 51-month long stretch that ended in March this year.

As per the company’s recent May 2017 sales report, overall performance was led by Asia Pacific which witnessed 49% rise in sales. Sale edged up 2% in North America. Sales slumped 15% in Latin America, while Europe, Africa and Middle East (EAME) witnessed a 6% dip.

The Asia Pacific region has been a consistent performer for Caterpillar since it posted the first positive reading in Aug 2016. The company has since then witnessed a growing trend in sales in the region with the growth graph steadily picking up steam from single digits to the 49% growth witnessed in May. It is also worth mentioning that after four successive months of declines, North America has delivered positive growth in May. Though in Latin America, growth still remains in the negative territory and is muted compared with the prior months this year.

Caterpillar, Inc. Price

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

Overall sales at Resource Industries were down 3%, nevertheless an improvement from the 19% decline suffered in March and April. Latin American sales witnessed the maximum decline of 50%, followed by a 3% drop in North America. EAME sales were flat. Asia Pacific was the only region to put up a positive growth of 34%, a massive turnaround from the 6% drop in April.

Sales in Construction Industries improved 11% year over year, depicting an upward trend since Feb 2017.  Sales surged 52% in Asia Pacific and went up 9% in Latin America. The rise of 4% observed in North America helped offset the 7% decline in EAME. The construction industry has now entered a more mature phase of expansion, and construction spending can be anticipated to see moderate gains through 2017 and beyond.

Sales in the Energy & Transportation segment rose 4%, an improvement from the 2% dip in April. Sales to the Oil and Gas sector, Transportation sector and Industrial sector posted a rise of 13%, 9% and 4%, respectively. This helped offset a 10% decline in sales to the Power Generation Sector.

Caterpillar which has so far been grappling with the commodities rout triggered by a slowdown in China and excess supplies of most metals and energy products, is finally showing signs of turnaround this year. This was made possible by its relentless cost saving actions along with improvement in construction and Asia Pacific. In the first quarter of 2017, the company delivered year-over-year improvement in both the top line and bottom line for the first time in 10 quarters. Backlog improved on a year-over-year basis for the first time since the third quarter of 2014.

The company has outperformed the Zacks categorized Machinery – Construction/ Mining subindustry on a year-to-date basis. Shares have gained 17.3% while the industry registered an increase of 16.5%.

Quoting activity remains promising in many of Caterpillar’s markets and retail sales are turning positive for both machines and Energy & Transportation for the first time in several years. The company estimates revenues around $38 to $41 billion for 2017, depicting a 2% rise from the revenues reported in fiscal 2016. It now anticipates earnings per share (excluding restructuring costs) of $3.75, reflecting a 10% improvement over 2016 earnings.

The Zacks Consensus Estimate for fiscal 2017 for revenues and earnings are $40.21 billion and $4.13, respectively. Notably, both the figures are higher than the company’s respective guidance. Estimates for Caterpillar have moved up in the past 60 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2017 has gone up 28% while that of fiscal 2018 has moved up 18%.

Caterpillar recently announced that its board of directors have approved 1.3% increase in quarterly dividend to 78 cents per share after a hiatus of two years. The move reflects balance sheet strength and improved cost structure which has once again enabled the company to deliver incremental returns to shareholders. Going forward, Caterpillar is expected to benefit from President Trump’s plans of big spending in infrastructure as it is anticipated to play a major role in the national infrastructure plan.

Caterpillar currently sports a Zacks Rank #1 (Strong Buy).

Other top-ranked companies in the industrial product space include AGCO Corporation AGCO, Deere & Company DE and Rockwell Automation Inc. ROK. AGCO and Deere flaunt the same rank as Caterpillar while Rockwell Automation carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has expected long-term growth of 12.11%.

Deere has an expected long-term growth of 9.17%.

Rockwell Automation has an expected long-term growth of 10.63%.

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