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Analyst Blog

On May 15, 2014, we issued an updated research report on Caterpillar Inc. (CAT - Analyst Report). Caterpillar delivered a 22% increase in its first-quarter 2014 earnings to $1.61 per share. The numbers outshone the 5.5% increase reported in fourth-quarter 2013, the only quarter to have recorded year-over-year (y-o-y) growth last year. The company had last witnessed earnings growth in the double-digit range in the third quarter of 2012.

The company's incessant efforts to cut down on costs, continued deployment of lean manufacturing initiatives and improvement in the Construction segment helped mitigate the effect of lower mining-related sales on its profits.

Caterpillar’s estimates are undergoing positive revisions following its strong first-quarter results reported on Apr 24. 12 of the 14 estimates have gone up for Caterpillar over the last 30 days for fiscal 2014 and fiscal 2015. The Zacks Consensus Estimate for fiscal 2014 has gone up 5% to $6.15, while for 2015, it has gone up 4% to $7.06.

The Zacks Consensus Estimate for fiscal 2014 is above the company’s guidance of $6.10. Given the sound first-quarter performance, Caterpillar had increased its earnings per share guidance to $6.10 from the previous forecast of $5.85. Caterpillar expects revenues in 2014 to be flat with 2013 or move up or down in a 5% range.

Segment-wise, Construction Industries' and Energy & Transportation will deliver sales growth, while Resource Industries will continue to be a deterring factor due to sluggish order rates for mining equipment. Caterpillar will also benefit from the recovery in the construction sector and macroeconomic stabilization in Europe. Management also expects a number of smaller acquisitions in 2014, particularly focused on Energy & Transportation.

Caterpillar repurchased approximately $1.7 billion of its common stock under an accelerated stock repurchase transaction in the first quarter of 2014, completing its $7.5 billion repurchase authorization. In Jan 2014, its board approved a new authorization to repurchase upto $10 billion of Caterpillar common stock, which will expire on Dec 31, 2018. Share repurchases will be accretive to earnings in 2014 and provide support to the stock.

Caterpillar reported a backlog of $19.3 billion at the end of the first quarter, up 7% year over year, driven by improvement in Energy & Transportation, mainly locomotives. This marks a reversal from the decline in backlog reported earlier.

Caterpillar currently carries a Zacks Rank #1 (Strong Buy).

Key Picks from the Sector

Some other stocks that are worth considering in this sector include Gorman-Rupp Co. (GRC - Snapshot Report), Columbus McKinnon Corp. (CMCO - Snapshot Report) and Komatsu Ltd. (KMTUY). While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), Columbus McKinnon and Komatsu carry a Zacks Rank #2 (Buy).

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