Caterpillar (CAT, Financial) is seeing difficult times this year, but it is trying to improve its performance. The lean manufacturing initiatives such as lowering costs, improving cash flow and driving value for customers have helped the company post significant improvement in its net income of late.
Its sales have been hurt due to a downturn in the mining equipment sales that slumped 33% earlier this year. Also the mining sector was hit hard due to sales of large tractors, mining loaders and closure of plants but strong results in residential and commercial construction in various regions along with power system have helped the company to make up for the shortfall in the mining.
Cost-cutting leading to earnings growth
However, Caterpillar has raised its outlook as it anticipates total earnings of $6.10 per share, up 4.3% from previously forecast $5.85 per share for the full Fiscal year. This new guidance is up about 5% from analyst’s estimates of $5.81 for the full year. And its total net sales are expected to be nearly $56.00 billion with plus or minus of 5% for the full calendar year 2014.
The good news for the shareholders and investors is that the company is expecting healthy progress in sales in the construction industry and Energy & Transportation throughout the year, which will certainly help the company to execute enhanced operational and financial results. Caterpillar as stated above posted significant growth of 20% in the construction industry led by strong demand from dealers as they kept building inventory for the upcoming selling season. Caterpillar now expects solid growth of 10% for the full year in the construction segment on the back of solid construction equipment such as excavators and backhoes. It had earlier anticipated 5% growth in the segment for full year.
Moreover, Caterpillar is experiencing definitely a more usual seasonal pattern as the end user demand is continuously increasing; that will eventually increase its sales as more and more dealers will try to build inventories for the remaining year. Besides, the secon -quarter is usually the pick season for the company historically that generates better margins. So far the company has witnessed 9% increase in dealers’ delivery in the current quarter and the company expects it to grow quite a lot in the quarter.
Improvements ahead
As per the Census Bureau data compiled by Bloomberg, the non-residential construction spending in the U.S. rose 6% in February from a year earlier while residential spending gained 13%. As these numbers are expected to grow significantly in the coming months, the dealers and Caterpillar are determined to generate better results from this favorable trend. While Caterpillar was happy to notice potential improvement in residential construction, its commercial construction also surprised the company as it started getting kicked and building the momentum especially in North America.
However the company is strangled with a tough time for mining due to the economic slowdown in various regions. With global economic growth just expected to grow 3% from 2% in 2013 will pressurize mining output. But if the growth gets accelerated it could well support the commodity prices and in turn the output for mining equipment will rise, eventually strengthening the sector. However Caterpillar is expecting potential sales from its new equipment in the mining and resource Industry but it's low enough to downside the risk for 2014.
Caterpillar expects 20% downturn in mining equipment but reiterated if economic activity around the world accelerates it will lead to an increase in mining orders meaningfully for the year. Also the Chinese economy is getting better with a 7.5% growth rate, and many reforms are being made to transition it to a more sustainable model while maintaining social stability will certainly help Caterpillar to post better results in the coming years. In addition, Caterpillar is focused to implement a proven business model along with its dealers and suppliers who continue to invest in China will certainly enhance its growth in China which is considerably very potential market for the company.
Also, the company is quite concern regarding the political conflict between Russia and Ukraine, which is hurting Caterpillar’s sale in the region. These are the few reasons why the company is little cautions while making investment to boost its sales in these regions.
However the company is determined to offset this downturn in mining equipment with the robust performance in its construction machinery in various regions. Caterpillar witnessed tremendous improvement in sales as it posted about 36% growth in North America, 20% growth in Europe, Africa, Middle East, up about 10% in Asia Pacific, and were almost flat in Latin America. Furthermore, it expects enough growth in these regions as its gaining adequate traction in the market for its construction machineries.
Conclusion
Caterpillar currently trades at the trailing P/E of 17.68 and forward P/E of 14.53, while it maintains strong operating margin of 10.71%. The company also provides profit margin of 6.88%. Caterpillar has total operating cash of 10.66 billion and its free cash flow stands at 6.73 billion, while its total outstanding debt is about 38.1 billion, but it is well mixed by most measure. Also the company plans to sell $2.00 billion of notes including the first 50-year bonds offered in the U.S. in 11 months, which will certainly provide the company financial flexibility and improve its profitability in the coming years. Besides the analysts have estimated CAGR of 12.81% for the next five years, undoubtedly good growth comparatively and make it attractive platform for investment in the long run.
