Thursday, July 21, 2011

Caterpillar Inc. (NYSE: CAT): Q2 Earnings Preview 2011

Caterpillar Inc. (NYSE: CAT), the world's largest maker of earthmoving equipment, is scheduled to release its first quarter earnings before the openng bell on Friday, July 22, 2011. Analysts, on average, expect he company to report earnings of $1.79 a share on revenue of $13.52 billion. In the year ago quarter, the company reported earnings of $1.09 per share on revenue of $10.41 billion.

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines worldwide.

In the preceding first quarter, the Peoria, Illinois-based company's net income was $1.23 billion, or $1.84 a share, up from $233 million, or 36 cents a share, in the year-earlier quarter. Revenue rose  to $12.95 billion from $8.24 billion. Analysts, on average, expecte the company to report earnings of 28 cents a share on revenue of $8.11 billion. 

The company’s order backlog was $20.8 billion, up 11%, at the end of the quarter. Capital expenditures are expected to reach $3 billion this year, with more than half of that spent in the U.S.

At its last earnings call in April, Caterpillar lifted its 2011 profit target to a range of $6.25 to $6.75 a share, from near $6 a share. The company expects full-year revenues in the range of $52 billion to $54 billionCaterpillar said it would have been even more optimistic about its outlook if its supply chain hadn’t been disrupted by the earthquake in Japan. By the end of the year, the company is expecting a negative impact on sales of about $300 million and on operating profit of about $100 million.

Companies in the farm and construction industry have been performing well recently. With the expanding markets of China, India and Latin America driving demanding for construction equipments such as cranes and positive signs out of the U.S. market, farm and construction companies such as Caterpillar Inc. could be well positioned moving forward. Analysts expect long-term factors such as growth in infrastructure and demand for commodities, especially in emerging markets, to drive Caterpillar to record profits in coming years.

Caterpillar’s strong brand name, pricing power and global dealer network enable it to take advantage of the growing need for infrastructure development worldwide. Caterpillar’s expansion plans of opening new facilities and expanding existing operations, particularly in the emerging markets, will boost its long-term potential.

The company plans to invest $5 billion by 2015 to expand its production capacity. In Asia alone, it aims to be able to produce 180,000 pieces of heavy equipment in the region by the end of 2015, up from a capacity of about 68,000 at the end of 2010.

However, growth in China has cooled off a bit in recent weeks as the government has delayed major public works programs. Tighter credit also has dampened heavy machinery sales. Stiff competition from Japanese heavy-equipment manufacturer Komatsu notwithstanding, CAT has staked a claim in China. And despite the near-term delays, China still plans to build 10 million public housing units in the next couple of years. CAT reportedly plans to spend $1 billion to increase its manufacturing capability in the country and has formed a joint venture with AVIC Liyuan Hydraulics for hydraulic pumps.

The company recently completed the biggest deal ever in its history, namely the $8.8 billion buyout of Bucyrus International Inc. The combined portfolio broadens Caterpillar's mining equipment product line, resulting in the most expansive product offering in the mining equipment industry. Caterpillar expects the deal to be accretive to its profit in the first full year, excluding 50 cents per share of one-time charges. Synergies expected from the deal include: Caterpillar remanufacturing products and services for Bucyrus equipment; sales and support from Caterpillar’s existing dealer network; use of Caterpillar’s engines and components in Bucyrus products; and cost efficiencies in purchasing, engineering and deployment of manufacturing best practices. In quantitative terms, synergy benefits are expected to noticeably add to operating profit in 2013 and exceed $400 million in 2015.

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