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Caterpillar Inc. (CAT - Analyst Report) ended fiscal 2010 on a promising note coming off a very challenging 2009. The company’s fourth quarter adjusted EPS increased almost four fold to $1.47 and fiscal 2010 adjusted EPS almost doubled to $4.15 from the prior-year comparable periods.

The upbeat results were augured by ever-increasing demand for mining and construction equipment that drove sales.

Both the fourth quarter and fiscal year EPS outperformed the respective Zacks Consensus Estimates of $1.27 and $4.01. Caterpillar also whizzed past its guided range of $3.80 to $4.00 for fiscal 2010.

The adjusted EPS for both the prior-year comparable periods excluded redundancy costs. Including redundancy costs, fourth quarter fiscal 2010 EPS was quadrupled from 36 cents reported in the year-ago quarter while fiscal 2010 EPS was almost three times the $1.43 reported in the prior year.  

Revenues in the quarter were $12.8 billion, a 62% jump from $7.9 billion in the year-ago period and well above the Zacks Consensus Estimate of $11.4 billion. Region wise, North America led the pack with a growth of 78%, followed by Latin America, Asia-Pacific and EAME markets posting impressive growth rates of 59%, 55% and 49%, respectively.

For fiscal 2010, revenues upped 31% year over year to $42.6 billion, outperforming the Zacks Consensus Estimate of $40 billion by a good margin. The reported revenue was also higher than the company’s guided revenue range of $41 million to $42 billion.

For the full year, Latin America led the results with a 58% climb, followed by Asia Pacific, North America, and EAME markets increasing 43%, 30% and 13%, respectively.

Cost of goods sold increased 60% year over year to $9.3 billion in the quarter but, as a percentage of revenue, declined 110 basis points to 73%. Selling, general and administrative (SG&A) expenses increased 18% to $1,109 million in the quarter and, as a percentage of revenues, improved 320 basis points to 8.7%.

Consequently, gross margin increased 110 basis points to 27% and operating margin expanded 850 basis points to 10.1% in the quarter.

Segment Performance

Machinery sales surged 88% to $8.6 billion in the quarter due to higher end-user demand and the absence of dealer inventory reductions seen in 2009. The segment posted an operating profit of $705 million in stark contrast to a loss of $123 million in the year-ago quarter.

Higher sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A, research and development (R&D) expenses and manufacturing costs.

Engines sales increased 36% to $3.57 billion primarily driven by higher sales of engines for electric power, petroleum and industrial applications. Increased price realization was offset by a negative currency translation impact. The segment’s operating profit increased a whopping 123% year over year to $539 million.

Increased sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A and R&D expenses.

Financial Products revenues dipped 6% to $666 million due to lower average earning assets. The segment’s operating profit went up 62% to $102 million.

The increase was driven by a $26 million decrease in the provision for credit losses at Cat Financial, a $23 million favorable change from returned or repossessed equipment and a $13 million favorable impact due to lower claims experienced at Cat Insurance, partially offset by a $14 million unfavorable impact from lower average earning assets and $11 million due to incentive pay.

Financial Position

Caterpillar had cash and cash equivalents of $3.59 billion on the balance sheet as of December 31, 2010, up from $2.3 billion as of September 30, 2010. The company generated net cash from operating activities of $5 billion from operating activities in fiscal 2010 compared with $6.5 billion in the prior year.

Machinery and Engines’ debt-to-capital ratio improved to 34.8% as of December 31, 2010compared with 39.1% as of September 30, 2010 and 47.2% as of December 31, 2009.

Looking to 2011

Caterpillar expects its sales to cross the $50 billion mark in fiscal 2011. This translates into a 17% year-over-year growth from sales of $42.6 billion recorded in fiscal 2010. Developing countries are expected to maintain their growth trajectory along with improving economies in North America and Europe.

Strong demand for mining products and the need for dealers to add to inventories and replenish rental fleet are expected to be accretive to 2011 sales. The company however admitted that these increases might be marred by small declines in later cycle industries, such as turbines and marine engines.

The company expects the world economy to grow more than 3.5% in 2010 driven by a growth of 6.5% from developing economies. The Asia-Pacific economy should grow 7.5% in 2011. Caterpillar forecasts a growth of 4.5% in Latin America and more than 5% growth in Africa/Middle East, and the CIS in 2011. The U.S economy is expected to grow about 3.5% in 2011 and Europe to post a 2% growth.

Earnings per share are expected to be near $6.00, suggesting 45% year-over-year growth from the 2010 figure of $4.15. The EPS growth is expected to be driven by higher sales volume, improvement in price realization, comparatively flat material costs, somewhat offset by unfavorable product mix, higher manufacturing costs, SG&A and R&D expense, higher taxes and bridge financing costs associated with the Bucyrus acquisition.

If Caterpillar accomplishes this lofty target, 2011 will be a milestone year for the company with the highest EPS in its history, topping the prior record of $5.66 set in 2008.

During the year, Caterpillar made a number of announcements to enhance its capacity for key products like mining trucks and excavators, which include three new facilities in the United States and significantly five outside the United States. Caterpillar plans to expend about $3 billion in capital expenditures, with more than half earmarked to be spent in the United States.

During 2010 Caterpillar announced three significant acquisitions — Electro-Motive Diesel Inc, Motoren-Werke Mannheim Holding GmbH and Bucyrus International Inc. . The 2011 guidance includes the impact of the Electro-Motive Diesel Inc. deal but excludes the acquisitions of the other two as these are yet to close.

Our Take

Caterpillar’s strong brand name, pricing power and global dealer network put it in a vantage position to capitalize on the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in emerging markets, will boost its long-term potential. Furthermore, its biggest acquisition to date, Bucyrus, will not only enhance its product line and increase its presence in the emerging markets, but also strengthen its position as the #1 mining equipment manufacturer in the U.S. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. The company operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with CNH Global NV , Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY) but is way ahead of its peers.

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