Market Overview

Did Big Cat Just Purr?


Caterpillar (NYSE: CAT) reported earnings this morning that missed Wall Street estimates on the bottom line, but beat on the top line, but shares are getting cracked hard this morning, down nearly 6%.

This begs to question: Is Caterpillar losing its mojo?

The Peoria, Ill.-based company reported earnings of $1.72 per share on $14.2 billion in revenues. Wall Street analysts had been expecting earnings of $1.79 per share on $13.52 billion in revenues. The $14.2 billion that Caterpillar had in revenues was the highest quarterly revenue it has ever had, and all regions were soaring. North America rose 35%, Latin America rose 28%, and Europe, the Middle East and Africa rose 51%.

The company guided full year earnings at $6.25-$7.25 per share, and expects $54-$56 billion in revenues, including the acquisition of Bucyrus, which closed during the second quarter. Caterpillar said it expects Bucyrus to have a negative impact of 50 cents per share during 2011, but the Bucyrus year is already half over, so it only expects a drop of 25 cents going forward.

In the press release, CEO Doug Oberhelman said, "Customer demand around the world continues to improve, and our sales and revenues reached an all-time record in the second quarter. Our employees, dealers and suppliers should feel great about the way they're responding to the increase in customer demand."

Oberhelman went on to say, "We're currently focused on four big themes linked to our corporate strategy. The first is executing the Cat business model and improving value for our customers. We're doing that in a number of ways—improving quality, executing the Caterpillar Production System and the development of new products and solutions—such as our new range of products for Tier 4 emissions. The second theme is increasing capacity and production levels to satisfy the demand we see today and what's down the road as the global economy continues to improve over the next few years. We've announced many significant investments in the United States and around the world over the past year and are expecting capital expenditures of about $3 billion in 2011. Demand growth and our investments through the end of June have resulted in more than 27,000 additional people in our global workforce since the beginning of 2010. We expect to continue hiring in 2011, including at our brand new U.S. facilities in Texas, Indiana, North Carolina and Ohio," Oberhelman said.

On the conference call, the company said that it sees softening in China, which is tremendous news for Caterpillar, where it generates a significant portion of its revenues. Earlier in the week, we saw China have a PMI of less than 50, which indicates contraction in the economy. Oberhelman said he still expects China to grow over 9% this year, and 3.5% for the rest of the world.

A softening in China is enormous news for China for two reasons. Either the world's largest economy by population is going to come to a hard landing and hurt all material names, or Caterpillar is losing market share to competitors.

Having said that, the company is very positive on its future, especially for the next four years, as it feels especially positive on the merger. Factoring in the events in Japan earlier in the year, Caterpillar said production is back to or ahead of pre-crisis levels. On July 11, Caterpillar added 10,000 new employees to the mining division and should be completed by August 10th, thanks in large part to the Bucyrus deal.

Caterpillar said during the call that it now has the broadest equipment and services offering in the mining sector, and practically every mining company in the world is happy about the deal. It will be able to see more Bucyrus machines than engines. Bucyrus will add to sales by about $2 billion.

Going forward, Caterpillar said it expects to spend its money funding growth opportunities, a modest dividend increase, and continued buybacks.

At 11.8 times forward earnings, and sporting a 1.7% dividend yield, shares are not overly priced at these levels. The softening in China is extremely worrisome, especially as some are saying the reflation trade in China is over. In the past three months, shares have fallen just over 3%, as worries persist that the "Caterpillar cycle" is coming to an end.

It looks like this Caterpillar is not becoming a butterfly anytime soon, especially at these levels.


Traders who believe that Caterpillar is going to see strong growth around the world might want to consider the following trades:

  • Adding to a position in CAT, especially on today's sell off. Shares of CAT normally trade around 16 times earnings, so there is plenty of upside from these levels.
  • Consider competitors, such as Joy Global (NASDAQ: JOYG) which are getting hit on the Caterpillar report.

Traders who believe that Caterpillar's strong growth is likely coming to an end may consider alternate positions:

  • Short Caterpillar, as the multiple will continue to contract if the market suspects that Caterpillar is losing market share or the market as a whole is shrinking.

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