Strong End Markets, Cost Control to Drive Caterpillar (CAT)

On Feb 7, we issued an updated research report on the mining and construction equipment behemoth, Caterpillar Inc. CAT. With its end markets — construction, mining and energy showing positive momentum lately, the company seems poised for an improved 2018.

 

Stellar Q4 Performance

 

Caterpillar delivered an upbeat fourth quarter with adjusted earnings per share soaring 160%, while revenues improved 35%. The improvement can be attributed to higher sales volume, owing to improved end-user demand across all regions and most end markets. This marked the company’s fourth consecutive quarter of both top and bottom-line growth, after a string of dismal performances for four years.

 

Retail Sales on a Growth Path

 

Caterpillar reported a 34% rise in global retail sales for the three months ended December 2017, with improvement noted across all regions — registering its best performance last year. Within Machines, Resource Industries and Construction Industries reported positive gains for the sixth and eleventh consecutive months, respectively, and scaled 2017-peak levels in December. Energy & Transportation’s retail sales improved for the fourth consecutive month. The company’s overall retail sales growth graph has remained in the positive territory since March 2017. In fact, the company witnessed a 1% rise in machine retail sales in March, which put an end to its unprecedented 51-month long stretch of declining sales. Retail sales averaged 10.3% in 2017.

 

 

Given its turnaround performance, the company has outperformed the industry in the past year. Shares have surged 64.3% while the industry registered growth of 63.8%.

 

2018 View Upbeat

 

Strong sales momentum resulting from strong order rates, lean dealer inventories and an increasing backlog bode well for an improved 2018 performance. Given these factors, along with positive economic indicators globally and many of the company’s end markets, Caterpillar initiated adjusted EPS guidance range of $8.25-$9.25 for fiscal 2018. The midpoint of the guidance range reflects 27% year-over-year growth.

 

The Zacks Consensus Estimate for 2018 for revenues and earnings is at $50.5 billion and $9.09, respectively. Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate have gone up 16% for both fiscal 2018 and fiscal 2019. 

The stock has an estimated long-term earnings growth rate of 10.33%.

 

Segments Poised for Growth

 

Caterpillar expects growth in Construction Industries in 2018, with some moderation in the latter part of the year due to anticipated seasonality of sales in China. Most other APAC countries are expected to grow, attributed to investments in infrastructure. In North America, continued improvement in residential and non-residential construction as well as revival in infrastructure demand will drive revenues. President Trump’s plans of big spending in infrastructure would boost Caterpillar’s revenues, since it is expected to play a major role in the national infrastructure plan.

 

Global economic momentum and increasing commodity prices is restoring miners’ profitability and resuming capital spending. This bodes well for the Resource Industries segment. Rebuild and aftermarket demand should continue as fleet utilization increases. Demand for new equipment also grows with an extension of existing mines.

 

Coming to the Energy & Transportation segment, sales into Oil and Gas applications are expected to increase in 2018, led by reciprocating engines for gas compression and well-servicing activity in North America. Sales to Transportation sector will benefit from recent acquisitions in rail services.

 

Restructuring, Expanded Offerings to Drive Growth

 

In September 2015, Caterpillar set out with significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower annual operating costs by about $1.5 billion. This includes the consolidation or closure of more than 30 facilities and reduction of workforce by more than 16,000.

 

Caterpillar continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and jobsites along with developing the next generation of more productive and efficient products. The company is readying factories and suppliers to meet increased demand, while remaining focused on developing a more competitive and flexible cost structure. This should enable it to respond quickly if economic fundamentals change.

 

The company is in the early stages of implementing its strategy for profitable growth. During 2018, the company will continue to make additional investments in expanded offerings and services important for long-term success. It will use Operating & Execution Model to divert resources to areas that represent the greatest opportunity for return on investments.

 

Caterpillar currently carries a Zacks Rank #2 (Buy). 

 

Other top-ranked companies in the industrial product space include Applied Industrial Technologies, Inc.AIT, H&E Equipment Services, Inc. HEES and Dover Corporation DOV . All these stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Applied Industrial Technologies has an expected long-term growth of 12%. Its shares have surged 26% in the past six months.

 

H&E Equipment Services has expected long-term growth of 18.6%. It shares have rallied 69% over the past six months.

 

Dover has expected long-term growth of 13%. Over the past six months, its shares have gone up 15%.

 

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