The world’s leading supplier of construction and mining machinery, Caterpillar (CAT, Financial), reported striking growth of 14.2% in its earnings at the close of the second quarter. Caterpillar announced a profit per share of $1.69 for the second quarter, compared to $1.48 per share in the same quarter last year. The company managed to report sizable progress in profit despite its poor performance for resource industries. Caterpillar's net profit increased about 4.06% to $999 million from $960 million in the second quarter last year.
In addition, Caterpillar was also excited to report an increase of 2% year over year to $3.44 billion in retail new business volume. This increase was mainly driven by the strong progress in sales of Cat equipment in North America, counterbalancing the slope in the resources industries. However, its revenue declined approximately 3.21% year over year to $14.15 billion.
Looking forward
Caterpillar said it would soon initiate an accelerated $2.5 billion stock repurchase plan. The company has entered into the strategic relationship with Societe Generale (SCGLY) to purchase approximately 22 million of its own shares worth $2.31 billion, which guided its stock to surge nearly 1.2% to $105.44 in the aftermath. It has also made two substantial increases in its quarterly dividend when it announced 15% in dividend last year, and 17% this year.
Moreover, Caterpillar has also accelerated its profit outlook for the full year to $5.75 per share from the earlier guidelines of $5.55 a share, and expects its revenue to be in the range of $54 billion to $56 billion for the full year, which is slightly lower than its earlier guidance of $53 billion to $58 billion announced at the end of first quarter 2014. Caterpillar expects its consistency in the business, execution and cash friendly deployment for shareholders to drive growth for its business.
How the future looksÂ
Caterpillar saw a relatively flat performance this quarter for most of its segment except its construction machinery segment, which performed extremely well in the reported quarter, with sales rising about 11 percent. It further expects this momentum to carry on to the third quarter of 2014 in its construction segment due to the strong demand in the North America and in EAME regions, mainly in Europe which remains a potential zone for the company for its construction machinery segment. However, the rising interest rates in Brazil do raise some concerns for Caterpillar and that will affects its construction sales in the remaining half of the calendar year 2014.
Mining equipment sales were relatively better, though not as good as the second quarter of 2013. However, it is the first time where sales for the mining equipment for the first and second quarter of 2014 did not decline since 2012. In fact, its second quarter mining business was slightly better than the first quarter of 2014, providing the shareholders with some sort of relief. Further, Caterpillar remains strong to keep up the momentum with the flat sales this year for the segment.Â
However, the company sees uncertain global growth across its diversified product portfolios that could slow down its progress this year. Caterpillar expects tempering results outside the U.S., including a few emerging markets such as Brazil and China. The surging interest rates will certainly slow down sales in Brazil, while the Chinese market has fallen slightly from its first quarter, despite accelerated stimulus the company initiated in the region.
Nevertheless, the company remains quite optimistic with strategic investment in its benefits plans that are needed for additional funding. And its machinery engines and transportations at the capital ratio is at the low-end of our target range, reflecting good progress in its benefit plans. Moreover, the company has its production capacity in place now that will gear up its growth going forward. The company is more focused on executing its strategies and improving its operational performance that should help the company to have control on its costs and improve its SG&A and R&D expenses.
Wrapping up
Caterpillar currently trades at the forward P/E multiple of 14.52 against its trailing P/E multiple of 17.79, with expected PEG ratio of 1.30 for the next five years indicated robust growth for Caterpillar going forward. The company remains pretty reasonable on the performance matrix with its profit and operating profit margins of 7.01% and 10.39% respectively. Its notable growth of 20.12% in ROE and 4.09% in ROA adds value to its growth in earnings per share. Caterpillar has a strong operating cash flow of $9.73 billion and free cash flow of $5.82 billion.
Apart from this, the analysts have estimated CAGR of 12.84% for the next five years that signifies comparatively strong prospects for the company in the future and could turn out to be a great pick for investors who are looking to include a stock that drives long-run growth in their investment portfolios.
