CAT: Sales Growth Dips, Shares Fall

Caterpillar Inc. ( CAT - Analyst Report ) recorded machines sales growth of 11% for the three months ending May 31, 2012. Even though it has maintained a 25-month run of sales growth, there has been a clear downward trend year to date.

Growth slackened from 27% in January, 21% in February, 18% in March and 12% in April this year. Caterpillar shares fell 2% on the news.

Compared to the lowest growth rate of 30% last year, the current growth rate of 11% is disappointing. Even though Caterpillar continues to book sales growth, the rate of increase has of late been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe and in Latin America. Sales growth is now less than one-sixth of the peak level of 66% in 2011.

Regional Statistics

Region-wise, the company registered the maximum growth of 31% in North America. Rest of the regions did not fare that well with Asia/Pacific recording a 5% increase, Middle East (EAME) with a 4% increment and Rest of the World (ROW) increasing a meager 2%. Sales in Latin America were a dampener, recording a drop of 6%.

Caterpillar sales in its largest market – North America – have 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 brisk growth in Asia/Pacific so far. However, of late, China's attempts to fight inflation have affected Caterpillar’s sales in the region. Asia/Pacific posted its lowest growth rate (5%) in 2012, a sharp contrast to the growth rate in the double digits in 2011 ranging from 20% to 65%.

Sales performance in ROW has hit a nadir so far in 2012. In Latin America, the growth rate is still in the red, posting a decline of 6%, but an improvement from the 13% drop in April 2012. This is way far down from the highest growth of 76% posted in February 2011 and even the lowest pace of 8% in November last year. EAME also posted its lowest growth so far in 2012.

In Reciprocating & Turbine Engine Retail Statistics, sales were up 2% year over year globally. Albeit results improved from the 1% decline in March 2012, the growth of 2% barely compares with the 21% rise recorded in May last year.

End Markets

Among the end markets, sales to the petroleum sector and transportation reported an increase of 25% and 9%, respectively. Sales to the petroleum sector and transportation have dipped further from the respective growth rates of 26% and 14% last month.

Electric Power decreased further to 19%, marking the third consecutive month of declining sales and in stark contrast to the 24% climb in January and 6% in February this year. The Industrial sector continued its string declining sales four months in a row, with sales dipping 6%.

First Quarter Recap, Guidance

During the recently reported first quarter, Caterpillar’s revenues surged 23% to a record $15.98 billion. Volumes were up for both new equipment and aftermarket parts as well as across all geographic regions except Latin America. Besides, price realization, and the Bucyrus and MotorenWerke Mannheim Holding GmbH acquisitions also contributed to the rise.

For 2012, the company expects to record sales in a range of $68.0 billion to $72.0 billion. The company has now factored in higher growth in North America that is expected to mitigate slowing sales in China and Brazil. EPS is forecast at $9.50 on the back of strong revenues. The targets, if achieved, would mark the highest revenues and profit in Caterpillar’s history, exceeding last year’s record.

Our Take

Caterpillar’s order backlog has steadily increased throughout the quarter and is at a new high, which holds promise for the year ahead. Many products have long lead times, with some slated for 2014. This bodes well for Caterpillar's future performance.

The company is persistently adding production capacity for many of its mining products. We believe that the top line at the company will continue to grow on the back of increasing demand for construction and mining equipment. Caterpillar plans to open new facilities and expand existing operations, particularly in the emerging markets, which will boost its long-term potential.

On the flip side, besides the European debt crisis, signs of a slowdown in China have triggered concerns. A slowing Chinese economy will have a negative effect on the infrastructure and construction spending with an immediate impact on Caterpillar’s sales in the near term.

We maintain our Neutral recommendation on Caterpillar due to the recent loss of momentum in sales growth, margin headwinds, negative impact of the European debt crisis and a slowing Chinese economy. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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 ( CNH - Snapshot Report ) , Komatsu Ltd. ( KMTUY ) and Volvo AB ( VOLVY ) .