Caterpillar Inc. (CAT), the world's largest manufacturer of construction and mining equipment, recently joined the bandwagon of companies who have trimmed their revenue and earnings expectations in the wake of weaker-than-expected growth in the global economy. This news led to a 2.4% fall in Caterpillar share prices to $88.73 in after-hours trading.
Factoring in modest and insipid economic growth through 2015 and a less likely scenario of a worldwide recession, Caterpillar expects to generate revenues in the range of $80 to $100 billion in 2015. This is expected to translate into earnings per share in the range of $12 to $18 per share. This is based on the assumption of modest price realization and restrained material cost increases.
The company also expects unrelenting focus on cost control as well as modest efficiency improvement in its factories to contribute to its earnings. Caterpillar had earlier estimated earnings between $15 and $20 per share. The company remains committed to delivering results that will place it in the top 25% of the S&P 500 for total shareholder return.
For 2012, the company remains firm on its guided record sales of $68 billion to $70 billion and EPS forecast at $9.60. Caterpillar will discuss its 2013 expectations when it releases its quarterly earnings next month. The year 2013 is expected to be like 2012 with respect to worldwide economic growth with better growth expected in 2014.
The company remains hopeful that construction activity in the emerging markets will witness modest improvement. The company plans to remain focused on its cost control measures and continue to invest in research and development. However, Caterpillar has opted to be cautious toward acquisitions and investments in expansion.
This development comes after a year Caterpillar acquired Bucyrus Inc., a South Milwaukee-based manufacturer of surface and underground mining equipment. The $8.8 billion buyout of Bucyrus was the biggest deal ever in Caterpillar’s history. It capitalized on the rising demand for coal and minerals triggered by growth in the emerging nations.
The Caterpillar-Bucyrus combined portfolio expanded Caterpillar's mining equipment product line, resulting in the most expansive product offering in the mining equipment industry. The acquisition positioned Caterpillar as the leading global mining original equipment manufacturer. The company also acquired underground coal mining equipment manufacturer ERA Mining Machinery Limited in China to strengthen its presence in the Chinese mining industry in November last year.
However, the company’s plans to expand in the mining and China is currently under pressure as mining companies are revisiting and trimming their capital expenditures plans following the slowdown in economic expansion in China, the world’s largest user of coal and metals. Prices for coal and iron ore have dropped more than 20% this year due to slowing growth in China and European debt problems.
Among other miners, Vale S.A. (VALE) plans to cut its 2013 mining budget and BHP Billiton Limited (BHP) delayed an estimated $68 billion of projects. Approximately 70% of spending in mines is for large trucks and thus the cutback paints a grim picture for Caterpillar.
All said, we maintain our Neutral recommendation on Caterpillar. Furthermore, the recent loss of sales momentum, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy remain concerns. 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.
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