The Rising Influence of Rising Affluence

[DewDiligence]

CAT’s 1Q11 Profit Quintuples; 2011 Guidance Raised

[When CAT announced its 2012 EPS guidance of $8-10 in mid 2009, I was skeptical, but this no longer seems out of reach. Still, CAT’s business is highly cyclical, the P/E based on 2011 guidance is 18x, and the stock has risen more than four-fold from the 2009 low, so caution is warranted, IMO.]

http://online.wsj.com/article/SB10001424052748703655404576292731918057082.html

›APRIL 30, 2011
By JAMES R. HAGERTY And BOB TITA

Caterpillar Inc. posted a first-quarter profit that was more than five times the depressed year-earlier result and raised its 2011 outlook on surging global demand for its mining equipment and a budding U.S. recovery for its construction machinery.

Caterpillar, based in Peoria, Ill., said it is having trouble keeping up with demand for some products, such as excavators and underground mining trucks. As the company builds and expands plants, it forecast capital spending of $3 billion this year, more than half of it in the U.S., up from $1.66 billion in 2010.

Results at the world's largest maker of construction and mining machinery are a broad gauge of world-wide spending on construction, mining, roads, energy exploration and electric-power generation. In a sign of its optimism, Caterpillar raised its forecast for full-year earnings, projecting profits would top its previous record, set in 2008.

Equipment price increases averaging around 2.5% from a year earlier more than made up for higher costs for steel and other materials in the latest quarter. Edward Rapp, chief financial officer, said in an interview that pricing increases for the year as a whole should roughly offset the effects of higher material costs.

Though prices of oil and metals have soared, high unemployment in the U.S. generally has kept a lid on wages, which are a bigger business cost than energy, Caterpillar said. At the same time, rising prices for copper, gold, iron and coal are spurring demand for the company's mining equipment.

"Demand is so strong that they aren't having trouble pushing through price increases," said Stephen Volkmann, an analyst at Jefferies & Co. in New York.

Sales to natural-resources industries, including mining and logging, climbed 84% from a year earlier, largely driven by demand in Latin America, Asia and Africa. Caterpillar also is selling more equipment used to generate electricity and power machinery used by the oil and gas industry.

Construction machinery sales are strong in Latin America and Asia, due to road, airport and other infrastructure projects, and are recovering from very low recession levels in the U.S. and Europe.

Though home building and other construction remains weak in the U.S., Caterpillar said customers are replacing worn-out equipment and dealers are restocking inventories and upgrading rental fleets.

Eventually, the U.S. construction market will recover, Douglas Oberhelman, the company's chief executive officer, told analysts. "All that is in front of us."

The Japanese earthquake and tsunami didn't damage Caterpillar's plants there but have led to "sporadic" production disruptions as some suppliers struggle to resume output of items such as parts for its hydraulic excavators. Caterpillar expects the disruptions to reduce global sales by about $300 million this year.

Caterpillar's first-quarter earnings totaled $1.23 billion, or $1.84 a share, up from $233 million, or 36 cents a share, a year earlier. Sales, including revenue from the financing arm, jumped 57% to $12.95 billion.

For the full year, Caterpillar said it expects per-share earnings of between $6.25 and $6.75 [excluding the BUCY acquisition expected to close in mid 2011], up from a previous forecast of nearly $6. That would top the prior record of $5.66 in 2008. Earnings per share plunged to $1.43 in 2009 before recovering to $4.15 last year.

Analysts welcomed a rise in operating profit margin to 14.3% from 6.1% a year earlier and 10.1% in the fourth quarter. In the past, Caterpillar has had trouble controlling costs when orders surged. "It's one of the best quarterly operating margins we've seen from the company," said Adam Fleck, an analyst for research firm Morningstar Inc. "Caterpillar seems to be managing their suppliers very well."

Even so, analysts are expecting slower profit growth for the rest of the year, largely because the year-earlier comparisons will be tougher.‹