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Caterpillar Poised to Ride on Asia, Cost Cuts & Construction

On Aug 10, we issued an updated research report on the mining and equipment behemoth, Caterpillar Inc. CAT. The company which had so far been struggling with weak mining has managed to deliver a turnaround performance this year thanks to its relentless cost saving actions along with improvement in construction and Asia Pacific.

Caterpillar’s top and bottom-lines both improved a respective 37% and 9.6% on a year-over-year basis in the second quarter and also beat the respective Zacks Consensus Estimate. This builds upon the momentum of the first quarter wherein Caterpillar reported year-over-year improvement in both top and bottom lines for the first time in 10 quarters. The better-than-expected results continue to be driven by its disciplined cost-control efforts.

Further, quoting activity remains promising in many of Caterpillar’s markets and retail sales are turning positive for both machines and Energy & Transportation for the first time in several years. At the end of second-quarter 2017, Caterpillar’s backlog was at $14.8 billion. On a year-over-year basis, order backlog improved by about $3 billion.

Owing to the upbeat first-half performance, improved order activity and disciplined cost control, Caterpillar also hiked revenue guidance during second-quarter conference call to the range of $42–$44 billion from the prior range of $38–$41 billion. The company now projects earnings per share of $5.00 per share compared with previous guidance of $3.75 per share. The mid-point of the revenue guidance and earnings per share guidance reflect a year-over-year growth of 12% and 46% respectively.

The Zacks Consensus Estimate for fiscal 2017 for revenues and earnings are $42.9 billion and $5.22, respectively. Estimates for Caterpillar have moved up in the past 30 days, reflecting the optimistic outlook of analysts. The earnings estimate for fiscal 2017 has risen 35% while that of fiscal 2018 has moved up 23%.

In September 2015, Caterpillar set upon significant restructuring and cost reduction initiative, with actions expected through 2018. Once fully implemented, the plan would lower its annual operating costs by about $1.5 billion. This will be backed by the consolidation or closure of more than 30 facilities that would decrease manufacturing square footage by more than 10% and reduce the workforce by more than 10,000 people.

During August 2016, Caterpillar witnessed the first positive overall reading in sales in the Asia Pacific region. The company has since then witnessed a growing trend in overall sales in the region with growth graph steadily picking up steam from single digits to the recent 40% in June. In Resource Industries, Asia Pacific has delivered positive growth in May (34%) and June (12%). In the region, Construction Industries has also shown marked improvement. Growth has particularly picked up in 2017 ranging from 27% in January 2017 to the latest figure of 48% in Jun 2017. Asia Pacific sales continue to increase primarily owing to increased infrastructure and residential investment in China.

Sales in Construction Industries has picked up from the low-single digits in February 2017 to 10% in June. The US Architecture Billings Index (ABI), an economic indicator that provides an approximately nine to 12 month glimpse into the future of non-residential construction spending activity, has been at 50 or better recently, signaling robust conditions ahead for the construction industry. As per Dodge Data & Analytics, total U.S. construction starts for 2017 will advance 5% to $713 billion. The construction industry has now entered a more mature phase of its expansion and construction spending can be anticipated to see moderate gains through 2017 and beyond.



The company has outperformed the industry on a year-to-date basis. Shares have gained 24.6% while the industry registered an increase of 22.2%. In fact, Caterpillar's share price has benefited since the victory of Donald Trump as investors expect his plans of big spending in infrastructure to boost revenues. Moreover, the stock has an estimated long-term earnings growth rate of 9.50%.

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

Other top-ranked companies in the industrial product space include AGCO Corporation AGCO, Terex Corporation TEX and Deere & Company DE. AGCO and Terex flaunts the same rank as Caterpillar while Deere carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

AGCO has expected long-term growth of 13.51%.

Deere & Company has an expected long-term growth of 9.17%.

Terex has an expected long-term growth of 19.67%.

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Terex Corporation (TEX): Free Stock Analysis Report
 
Caterpillar, Inc. (CAT): Free Stock Analysis Report
 
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