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Caterpillar November Sales up 26%, Will the Momentum Sustain?

Zacks Equity Research

Caterpillar Inc. CAT reported a rise of 26% in global retail sales for the three months ended November 2017. The company had last witnessed these levels in January 2012. This was driven by improvement across all regions with construction, mining and energy reporting the best performances year to date. Caterpillar shares hit a 52-week high of $149.05 on Dec 13, before closing the day a tad lower at $148.57.

The solid momentum in retail sales so far in 2017, strong third-quarter results and upbeat guidance are indications that the company is recovering. This instils optimism in the broader machinery sector as Caterpillar has been dominating the global manufacturing industry for long, owing to its size and scope of operations.

Caterpillar Notches 2017’s Best Performance

In November, Caterpillar’s performance was driven by a 43% increase in Asia Pacific sales. The region has been a consistent contributor for the company since it posted the first positive reading in August 2016. Latin America registered growth of 48% in October, double the pace witnessed in the preceding month. Europe, Africa and Middle East (“EAME”) sales were up 32%. North America sales also hit a 2017-high of 12%. Notably, Latin America, EAME and North America scaled peak levels in the month, while Asia Pacific lagged the high of 49% recorded in May.

Resource Industries segment delivered its best year-to-date performance with 35% growth in November sales, almost double the 18% growth in October. This was led by a surge of 85% in EAME sales. Latin America reported sales growth of 68% a massive jump from the 4% rise witnessed in October. Asia Pacific and North America reported a respective 9% and 5% growth.

Caterpillar, Inc. Price and Consensus

Caterpillar, Inc. Price and Consensus | Caterpillar, Inc. Quote

Sales growth in the Construction Industries segment also scaled a high at 25%. Sales advanced a robust 52% in Asia Pacific and 40% in Latin America. EAME and North America sales rose 17% and 14%, respectively.

Sales in the Energy & Transportation segment rose to the highest this year at 23%. Growth was led by sales to the Oil & Gas sector, which reported a 43% rise. Sales to the Transportation sector rose 35%, closely followed by Industrial sector, wherein sales improved 30%. Sales to the Power Generation sector were the only disappointment, registering a 7% drop.

A Comeback Performance in 2017

Caterpillar, which had been affected by a weak mining industry in the past few years, is on the comeback trail in 2017. The company has delivered year-over-year improvement in both top and bottom-line performance in the three quarters of 2017.

The company’s monthly retail sales growth graph has remained in the positive territory since March this year. In March, the company witnessed a 1% rise in machine retail sales which put an end to its unprecedented 51-month long stretch of declining sales. The company has delivered an average sales growth of around 11% since March. The improvement continues to be driven by the Asia-Pacific region and the construction sector. Notably, the Resource Industries has also picked up lately.

Caterpillar raised revenue guidance for the third time to $44 billion and projects earnings at $6.25. The mid-point of the revenue and earnings guidance reflects year-over-year growth of 14% and 83%, respectively.

Thus, Caterpillar has gained 60.2% on a year-to-date basis, outperforming the industry’s rally of 58.5% and the S&P 500’s 19.3%.

Will Caterpillar Be Able to Sustain the Momentum?

President Trump’s plans of spending big in infrastructure will boost Caterpillar’s revenues since it is expected to play a major role in the national infrastructure plan. Meanwhile, higher sales in Asia Pacific (particularly China) and North America driven by an uptick in pipeline construction along with an improved residential and non-residential construction will fuel growth in Construction Industries segment.

In China, the construction industry is improving on rising government spending. In 2017, the 10-ton-and-above excavator industry in the nation is expected to more than double from last year.

Resource Industries segment will gain on higher aftermarket parts sales. Energy & Transportation will be driven by improved sales of engines into industrial applications and strength in onshore North America oil and gas and transportation. Further, the ongoing efforts to reduce costs will boost Caterpillar’s margins.

Reflecting the solid prospects, all the 10 estimates available for both 2017 and 2018 for Caterpillar have moved up in the past 60 days. The earnings estimates for 2017 climbed 22% while that for 2018 moved up 15%. The Zacks Consensus Estimate for 2017 and 2018 earnings reflects growth of 88.22% and 20.49%, respectively.

The stock has an estimated long-term earnings growth rate of 10.33%. Caterpillar beat the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 53.06%.

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

Other Stocks to Consider

Some other top-ranked stocks in the sector include, Terex Corporation TEX and H&E Equipment Services, Inc. HEES and Komatsu Ltd. KMTUY. All the three stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Terex has expected long-term growth rate of 11.25%. Its shares have rallied 52%, year to date.

H&E Equipment Services has expected long-term growth rate of 15.55%. Its shares have surged 66%, year to date.

Komatsu has a long-term earnings growth rate of 16.2%. Its shares have gained 53% year to date.

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