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Caterpillar January Sales No Better

CAT VOLVY

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Caterpillar Inc(CAT - Analyst Report) recorded machines sales growth of 27% for the three months ending January 31, 2012, keeping up its 21-month run of positive sales growth. However, the sales growth has dipped further from the lowest growth rate of 30% last year. Engine sales increased 22% across the globe.

Caterpillar’s growth rate had hit rock bottom in 2011 in November last year recording a growth rate of 30%. Caterpillar suffered the same fate in December as well. Even though Caterpillar has seen sales ramping in the last 21 months, the rate of increase has of late been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe. Sales growth has more than halved from the highest level of 66% in 2011.

Regional Statistics

Region-wise, the company registered the maximum growth of 47% in North America, followed by Asia/Pacific and Rest of the World (ROW) with a 25% and 18% year-over-year increment. Europe, Africa, and the Middle East (EAME) and Latin America were up 16% and 13%, respectively.

Caterpillar in its largest market - North America -- has benefited from strong replacement demand as equipment users replace worn-out machinery and dealers replenish the equipment fleet for their rental businesses. Investments in infrastructure construction and mining in China, Australia and other developing economies have spurred demand for Caterpillar's machinery thereby contributing to solid growth in Asia Pacific.

However, China's recent attempts to fight inflation, along with sales and production disruptions in Japan following the earthquake, have raised a question on the sustainability of Caterpillar's Asian sales ramp.

Sales performance in EAME and ROW have further deteriorated from the lows experienced in 2011. In December the two regions had recorded sales growth of 18% and 20%, respectively. Sales in EAME is a drastic drop from the 46% growth recorded in January 2011 and more than one fourth the scorching pace of 65% recorded in May 2011. The sharp downside was primarily due to the sovereign debt crisis in Europe.

In Latin America, however, the growth rate has somewhat recovered from the lowest pace of 8% in November last year but it is still more than one fourth the rate of 56% posted in January last year. Growth in Latin America has benefitedfrom a boom in construction activity and mining expansion in up-and-coming countries like Brazil that called for more equipment sale.

In Reciprocating & Turbine Engine Retail Statistics, sales were up 22% year over year globally. Though the improvement was higher than 18% recorded in the sequentially preceding month, it was a tad lower than the 23% growth displayed in January last year.

End Markets

Among the end markets, sales to the petroleum sector reported the maximum increase of 29% year over year, followed by Electric Power, with a 24% year-over-year climb. However, sales to the petroleum sector moderated from the 33% growth in December and 42% in January last year.  The Electric power sector showed an improvement from 14% growth in January last year and 23% in December.

The Industrial sector was a major disappointment, growing at 1%, sliding further from the lowest point of 3% in 2011. Growth has tapered to single digits compared with the high of 59% in January 2011. Transportation was up 31%.

Fourth Quarter and fiscal 2011 Recap, Guidance

During the recently reported fourth quarter, Caterpillar’s revenues surged 35% to a record $17.2 billion, driven by higher sales volume, especially for new equipment. Excluding the impact of the acquisition of Bucyrus International, revenues went up 24% to $15.9 billion comparing favorably the Zacks Consensus Estimate of $15.6 billion.

For fiscal 2011, total revenue increased 35% to $57.6 billion, excluding the impact of Bucyrus. Including the impact, Caterpillar saw all time-record sales of $60.1 billion, up 41% from 2010, driven by increased sales volume (particularly new equipment) on higher end user demand. Revenues sailed past the Zacks Consensus Estimate of $58.1 billion.

For 2012, the company expects to record sales in a range of $68.0 billion to $72.0 billion for 2012, which includes accretions from Bucyrus and Motoren-Werke Mannheim Holding GmbH.  EPS is forecast at $9.25 per share on the back of strong revenues.

Our Take

Despite the lingering doubts overhanging the economy at large and Caterpillar’s recent loss of sales momentum, we believe the top line would continue to grow on the back of torrid demand for construction and mining equipment. Besides, the Bucyrus acquisition will further add to the top line. The shares of Caterpillar presently retain a Zacks #2 Rank (short-term Buy recommendation).

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.

Caterpillar operates two divisions – Machinery and Power Systems (M&PS) and Financial Products. Caterpillar competes with the likes of CNH Global NV , Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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