A Few Reasons Why Caterpillar's Weakness Is a Good Opportunity

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Nov 18, 2014

Caterpillar (CAT, Financial) recently announced revenue of $14.15 billion as compared to revenue of $14.62 billion in the period a year ago. However, its revenue could not match the Thomson Reuters consensus estimates for revenue of $14.46 billion. This indicates that Caterpillar's weakness is still continuing. But is there hope for the company in the long run?

What is Caterpillar up to?

Caterpillar has reported excellent execution during the quarter with robust cash flows, improved inventory turns, healthy growth in PINS and has also raised its profit outlook.

Caterpillar is executing well on its stock repurchase plan and expects to buy back $6.2 billion worth of Caterpillar stock from the beginning of 2013 last year to the end of the third quarter of this year and thus substantially increasing the quarterly dividend two times consecutively for this year.

There was a slight decline in the construction sales in Asia Pacific that also includes the feeble sales in China. Caterpillar had started the year 2014 with the increasing demand for construction equipment. The resource industries segment for the heavy equipment major decline 29%.

The sales for the resource industries were above the last quarter. Hence, the second quarter 2014 sales increased approximately 6% above the first quarter. Sales increased from the first quarter to the second for both new equipment segment and for parts segment as well. Actually, the parts segment witnessed the second consecutive quarterly improvement. The first quarter of 2014 was slightly better than the fourth quarter of ’13 and the second quarter of 2014 illustrated slightly better performance than the first quarter for the same period. The mining business is expected to witness sequential improvement.

The energy and transportation business of Caterpillar also recorded exceptionally high and stable performance for the quarter and over the previous years as well. The sales for oil and gas, transportation and industrial segments were individually flat. However, PowerGen declined in the high single-digits. The manufacturing cost and products utilization were reasonably positive while there were declines in the sales volume and restructuring costs during the quarter.

What's expected

Caterpillar has lowered its sales and revenue outlook, but it has increased its outlook for profit.

The sales and revenues are believed to be quite similar to the first quarter of 2014, and fourth-quarter sales are expected to match more or less with the second quarter of 2014. The profit per share for the fourth quarter of 2014 is forecasted to be nearly the average of the first and second quarters for the year.

Caterpillar repurchased $2 billion worth of stock in 2013 and increased the dividend by 15%. It raised the dividend again in June 2014 by an additional 17% and expects to have repurchased nearly $4.2 billion of stock by the end of the third quarter of 2014. So, it adds to a $1.7 billion in the first quarter and the $2.5 billion in the third quarter. Hence, these actions demonstrate its commitment to return substantial benefits to the stockholders.

Caterpillar expects to repurchase another $2.5 billion of its stock during the third quarter, which is believed to be a part of the 10 billion stock repurchase program of the company earlier this year. The key motive behind these repurchases over the past two years is the priority to return solid cash to the shareholders. The company needs to invest in growth, and its employee benefit plans require additional funding with very low interest rates.

Therefore, Caterpillar seems to be very well positioned to take substantial actions to boost shareholder return with considerable cash on hand.

The mining equipment sales are expected to be weak in the second half of the year. The company has witnessed no indication of the business revival, but do not expect the sales to decline further since sales are already so low. Moreover, Caterpillar projects a decline in sales for the construction segment, which initially had been forecasted for 10% growth.

There’re three key factors contributing to the continued strength of its financial results viz. healthy diversification of business for Caterpillar, huge success in operational improvements through solid execution of its strategy and the robustness of its cash flow and balance sheet.

Conclusion

Management is quite pleased with its continued solid performance during the second quarter driven by healthy continued growth in earning assets. Globally, Caterpillar financial team remains focused on assisting its customers and dealers succeed through financial services excellence.