Shares of Caterpillar (CAT – Free Caterpillar Stock Report) are up sharply in trading after the manufacturer's first-quarter results beat Wall Street expectations. Sales of $9.82 billion eclipsed our $9.02 billion estimate and the year-earlier figure of $9.46 billion, sparked by a significant ramp up in business within the Resource Industries segment. The unit experienced impressive demand for aftermarket parts. Concurrently, volume within the Construction Industries was about flat, while the Energy & Transportation business reported a modest increase for certain offerings.
The improvement in operating conditions was expected. The company had recently posted the first quarter-over-quarter gain in retail sales in the March period, reversing a trend of poor comparisons that goes back several years. Simultaneously, Caterpillar reaped the rewards of cost reduction and restructuring actions implemented in recent years. Among the steps taken to alleviate pressure on margins are massive layoffs (16,000 employees) and the closure and/or consolidation of 30 facilities globally. First-quarter results excluded $752 million in one-time costs. These steps buoyed share profit of $1.28 past our estimate of $0.65, as well as the year-ago figure of $0.67.
While Caterpillar plowed its way to solid performance in the March period, the venerable company declared signs of recovery in key end markets. In particular, there is strengthening quoting activity in many industries CAT serves. Increasing infrastructure and residential investments are accelerating construction equipment sales in China. Higher commodity prices and growing mining production in many corners of the world augurs well for Caterpillar, which despite efforts to diversify operations in recent years, retains significant exposure there. Recovering economic activity in various countries in South America is a good sign for capital equipment suppliers. Lastly, oil and gas producers globally have loosened their purse strings.
These factors led the heavy equipment maker to revise its 2017 sales outlook from a range of $36 billion-$39 billion to $38 billion-$41 billion. For the year, the Illinois-based entity expects share profit of $3.75, excluding restructuring costs of approximately $1.25 billion. We have increased our top- and bottom-line estimates by $2.08 billion and $0.50, to $40.0 billion and $3.75, respectively.
Uncertainty regarding U.S. trade policy bears watching. Should President Trump implement policies, notably tax reform and a trillion-dollar infrastructure spending initiative, intended to accelerate economic activity, Caterpillar will likely benefit. However, the company's international business is vulnerable to a strong U.S. dollar and contentious trade tactics. Altogether, CAT shares have surged since the Presidential election. Patient investors willing to wait for further improvement in Caterpillar's end markets may want to take a look at this blue-chip company. In the meantime, a well-covered dividend and above average dividend yield should appeal to income accounts.
About The Company: Caterpillar Inc. is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales account for about 47% of the company’s total.
