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Caterpillar Profits Soar, Boosts View

Zacks Equity Research

Caterpillar Inc. (CAT) has kicked off 2012 on a promising note by posting a 29% increase in earnings per share (EPS) to a record $2.37 in the first quarter, far ahead of the Zacks Consensus Estimate of $2.13. The outperformance was driven by growth in mining, strong replacement demand and the company’s relentless focus on cost-cutting.

Revenues soared 23% to $15.98 billion in the quarter, outpacing the Zacks Consensus Estimate of $15.82 billion. Volumes were up for both new equipment and aftermarket parts as well as across all geographic regions except Latin America. Furthermore, price realization, and the Bucyrus and Motoren-Werke Mannheim Holding GmbH (“MWM”) acquisitions also contributed to the rise.

Cost of sales increased 24% to $11.2 billion in the quarter. Manufacturing costs upped $268 million as a result of higher period costs related to production volume and capacity expansion programs. Higher steel prices pushed up material costs and freight costs were also up from the prior year.

Selling, general and administrative (SG&A) expenses increased 22% to $1.34 billion and research and development (R&D) expenses scaled up 12% to $587 million ascribed to higher volume, increased costs to support product programs and wage and benefit inflation. However, as a percent of revenues, SG&A and R&D expenses collectively declined 50 basis points in the quarter. 

Higher sales volume and improved price realization helped offset the rise in manufacturing costs, SG&A and R&D expenses and were instrumental in driving up the operating profit by 27% to $2.32 billion. Acquisitions, particularly Bucyrus, added $53 million to the operating profit. Operating margin improved 30 basis points to 14.5% in the quarter.

Segment Results

Machinery and Power System (M&PS) revenues surged 25% to $15.3 billion. Construction Industries sales improved on the back of higher sales volume in North America, particularly due to higher replacement demand. Sales were down in China and Brazil due to the government’s tightening of economic policies in 2011. Sales increased in Resource Industries mainly on the back of the Bucyrus acquisition and higher volume, particularly for new equipment. Power Systems sales increased as a result of improved sales volume and price realization. Machinery and Power System’s operating profit jumped 25% to $2.2 billion from $1.8 billion in the prior-year quarter, also due to higher sales volume and improved price realization.

Financial Products’ revenues grew 4% to $761 million due to the positive impact of higher average earning assets, somewhat offset by an unfavorable impact from lower interest rates on new and existing finance receivables. Financial Products’ profit increased to $205 million from $136 million in the first quarter of 2011. The increase was attributed to a $36 million decline in provision expense, an $18 million favorable impact from higher average earning assets and a positive impact of $13 million from higher net yield on average earning assets.

Financial Position

Caterpillar had cash and short-term investments of $2.8 billion as of March 31, 2012, down from $3.0 billion as of December 31, 2011. Total debt-to-capital ratio improved to 67% as of March 31, 2012 from 69% as of December 31, 2011. The debt-to-capital ratio at M&PS improved to 40.5% at the end of the reported quarter from 42.7% as of fiscal year-end 2011.

Total cash flow from operating activities in the quarter was $330 million compared with $765 million in the prior year quarter. Operating cash flow at M&PS declined to $234 million in the first quarter of 2012 from $1.64 billion in the prior-year quarter as a result of unfavorable changes in working capital and the payment of short-term incentive compensation based on record results in 2011.

Expectations for 2012

Caterpillar maintained its sales guidance in the range of $68 billion to $72 billion for 2012. The company has now factored in higher growth in North America that is expected to mitigate slowing sales and revenues in China and Brazil. Bucyrus and MWM sales are expected to be around $6 billion compared with $2.6 billion in 2011.

The company has upped its profit expectation to $9.50 per share from the prior outlook of $9.25 per share. Improved sales, price realization, the favorable impact of costs related to short-term employee incentive plans and benefits from acquisitions are expected to offset increase in period manufacturing costs and SG&A expense, and higher taxes.

Caterpillar estimates that the world economy would grow about 3% in 2012. The U.S. economy is expected to improve in 2012, with growth also around 3%.  Eurozone economic growth is expected to be near zero while Europe overall would be near half a percentage point.  Growth in China is estimated at 8.5% and Japan at 2%.  Economic growth in Australia is expected at 3%, boosted by two interest rate cuts and a strong mining sector.

Our Take

The guidance for 2012, if realized, would mark the highest revenues and profit in Caterpillar’s history, even ahead of last year’s ground-breaking results. Caterpillar is sitting on a record backlog that assures a promising 2012. 

Caterpillar's expansion plans of opening new facilities and furthering existing operations, particularly in the emerging markets, will boost its long-term potential. Furthermore, the Bucyrus acquisition has positioned Caterpillar as the leading global mining original equipment manufacturer. The Caterpillar-Bucyrus combined portfolio broadens Caterpillar's mining equipment product line, resulting in the most expansive product offering in the mining equipment industry. Shares of Caterpillar presently retain a Zacks #2 Rank (short-term Buy recommendation).

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 – M&PS and Financial Products. It competes with the likes of CNH Global NV (CNH), Komatsu Ltd.(KMTUY) and VolvoAB (VOLVY).

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