Shares of Caterpillar (CAT - Free Caterpillar Stock Report) rose nicely to a 52-week high after the manufacturer's second-quarter results beat Wall Street expectations. Sales of $11.33 billion eclipsed our $10.62 billion estimate and the year-earlier figure of $10.34 billion, sparked by improvement in the Construction Industries division. Similarly, the Resource Industries unit benefited from better end-user demand for aftermarket parts and the favorable impact of changes in dealer inventories. Lastly, the Energy & Transportation segment took advantage of greater demand for parts and services.
Progress in various end markets, when combined with controlled costs, helped Caterpillar generate higher profit margins and income. Excluding restructuring costs and a gain on the sale of an equity interest, share profit of $1.49 surged past our estimate of $1.10, as well as the year-earlier figure of $1.09.
As noted, due to healthier demand for offerings across a multitude of end markets and disciplined cost controls, the company has raised its 2017 outlook. The world's biggest manufacturer of earth-moving equipment expects sales of $42 billion-$44 billion, up from its previous forecast of $38 billion-$41 billion. It also is looking for share earnings of $5.00, up from $3.75. Growth in orders has led newly appointed CEO Jim Umpleby to call for investments to maintain the company's leading position in the industry. In particular, Mr. Umpleby has placed an emphasis on enhanced digital capabilities and accelerating technology updates to products.
A number of factors have contributed to the recent rise in CAT's share price. Leading the way was accelerating global economic activity, which should support sales of heavy equipment in the second half of 2017. In all, GDP growth in the U.S., Europe, Brazil, and India will probably be better than their respective levels in 2016. Another positive is the likelihood that the worst of the mining industry's secular decline is in the rearview mirror. Equipment sales are apt to stabilize, if not grow, in 2017, following a massive 40%+ plunge in total spending during 2016. Similarly, expenditures in the oil and gas arena are on pace for moderate gains, while the midstream sector continues to grow its appetite of new capacity. Increased construction activity has Caterpillar in a position of strength. Improved demand and spending levels by rental companies helped this venerable company to once again increase prices. For 2017, management is looking for price hikes to average as much as 4%, the highest level in years. Taking these factors together, we have sharply raised our 2017 top- and bottom-line estimates, to $43 billion and $5.00, respectively.
The recent performance overshadows various legal matters, with the biggest one being an investigation by the Internal Revenue Service (IRS) into profits earned by a Caterpillar subsidiary in Switzerland. The IRS has proposed taxes and penalties approximating $2.0 billion, which the company is contesting.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
