After initially rising, shares of Caterpillar (CAT - Free Caterpillar Stock Report) traded slightly lower after the maker of heavy equipment reported stellar fourth-quarter results. After surging last year (more below), some profit taking may have been to blame. Sales of $12.89 billion came in well above the year-earlier tally of $9.57 billion and our estimate of $11.43 billion. The better-than-expected performance was due to solid sales volumes, which helped lower dealer inventories. Furthermore, the improvement in end-user demand was across all regions and in most end markets. The benign operating backdrop was highlighted by a 34% year-over-year surge in worldwide retail machine sales during December, which followed a 26% increase in the previous month.
Adjusted share profits of $2.16 a share, which excluded the impact of U.S. tax reform, restructuring costs, and state deferred tax valuation allowance adjustments, was significantly higher than our $1.53 call and the $0.83 reported in the year-earlier period.
Positive economic indicators across all corners of the world, strong order rates, lean dealer inventories, and an increasing backlog suggests Caterpillar started 2018 with sales momentum. In order to meet incremental demand, Caterpillar is preparing factories and suppliers to ramp-up business. At the same time, the company is focused on maintaining a flexible cost structure that should enable it to respond quickly to fundamental changes.
Management expects the Construction Industries unit to benefit from rising spending levels in North American residential and non-residential, as well as infrastructure, markets. It is looking for continued growth in the Asia/Pacific and Europe regions. Global economic expansion and increasing commodity prices are likely to lead to improvement within the Resource Industries division. Higher machine utilization levels and strong aftermarket parts are also probable there. Lastly, the Energy & Transportation segment should get a boost from rising shale opportunities, which are punctuated by healthy conditions in the midstream pipeline business.
The manufacturer is looking for share profits to range between $8.25 and $9.25, excluding about $400 million in restructuring costs. The operating backdrop has led us to increase our 2018 top- and bottom-line estimates by $3.65 billion and $2.00, to $49 billion and $8.60 a share, respectively.
A multi-year rally has helped power CAT stock to record highs. In all, the issue gained an impressive 70% in 2017, which was its best one-year performance in over 10 years. Positive investor sentiment has buoyed the equity further in 2018, even with this modest price retracement. Given the favorable operating environment, investors may want to take a look at this blue chip.
About The Company: Caterpillar Incorporated is the world’s largest producer of earth-moving 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.
— Dominic Silva
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
