China or Not, You Can't Ignore Caterpillar

Heavy equipment manufacturer Caterpillar (NYSE: CAT  ) , one of the most closely watched of the so-called bellwether stocks, thus far isn't letting the global economic pullback -- including a softening China -- stunt its own earnings growth. In fact, in the course of releasing its results for the second quarter of 2012, the big company raised its full-year, earnings-per-share expectations.

In reporting its quarterly earnings -- which turned out to be the strongest in its history -- Caterpillar blasted the consensus forecast by the analysts who follow the world's largest maker of machinery for construction, mining, and other purposes. For the second quarter of 2012, the company recorded a profit of $1.67 billion, or $2.54 per share, compared with $1.02 billion, or $1.52 a share for the same quarter of 2011, a leap of 67% on the net income line. Wall Street was expecting $2.28 a share.

Revenue for the most recent quarter was up 21% to $17.37 billion, from $17.11 billion for the second quarter of 2011.

A brighter look at earnings prospects
Looking ahead, the company's management is still sufficiently confident of its markets and its margins that, while it tightened its sales expectation for the year to the lower half of its prior range, it simultaneously boosted its per-share earnings guidance for 2012. As such, rather than an anticipated revenue range of $68 billion-$72 billion, the new expectation has been narrowed to between $68 billion and $70 billion.

The difference between management's previous and current expectations relates to "weaker economic conditions in much of the world and about $1 billion of negative currency impacts." But, whereas management had earlier anticipated earnings near $9.50 per share for the full year, that figure has now been elevated to $9.60 per share.

In commenting on the quarter, Caterpillar CEO Doug Oberhelman said, "Our global footprint, the breadth of industries we serve, and our extensive line of products and services have helped us achieve these record-breaking results during this time of heightened economic uncertainty, and execution has been outstanding."

Strength at home
From a geographic perspective, North America led the earnings improvement parade at the company, followed by Asia/Pacific, where activity in Australia eclipsed the decline in China. And while sales in Europe were lower than a year ago, Africa, the Middle East and the CIS all recorded at least slightly stronger top lines.

Sales to the construction industry were $5.34 billion, an 8% hike from the year-ago quarter. As with the company's overall revenues, the most significant geographic factor in that increase was North America, which, while still well below its prior peak, was the site of a considerable amount of fleet upgrading. Sales to resource industries were $5.39 billion, a 68% year-on-year jump. Much of that increase was based on the company's acquisition of Bucyrus International, a manufacturer of mining equipment. Power systems sales were up 12% to $5.51 billion, with most of the growth occurring in the U.S.

A descriptive picture
During periods like the present, when essentially all public corporations are reporting their most recent quarterly results, differences in the amount and value of the information emanating from various companies becomes especially apparent. In my rarely tentative opinion, Caterpillar tends to be unusually informative. Along with descriptions of its own results, the company typically provides a usable analysis of the industry in which it operates, discussions about geographic activity, and a solid perspective on the global economy.

This quarter, Mike DeWalt, the company's director of investor relations, described the sliding demand for heavy equipment in China and the company's reaction to it on Caterpillar's post-release call. He began by noting that most of the demand for Caterpillar products in China relates to construction. And he also said that "...the construction equipment remains very weak, and it really hasn't shown much in the way of signs of improvement yet. In addition to weak demand, there is still quite a bit of inventory available on the ground in China."

Accordingly, Caterpillar is both working with dealers in China to increase equipment sales and endeavoring to reduce those dealers' inventories. The company is also lowering production in China "...because sales volumes in China haven't begun to improve much, we expect it will take a couple of more quarters to get inventory levels in China where we like them." If Caterpillar can crank out record quarters with the big Chinese market in the doldrums, there's clearly room for optimism about its potential when that market begins to recover.

The Foolish bottom line
Fools with an interest in the worldwide equipment industry would be wise to also monitor capital goods producer Terex (NYSE: TEX  ) , which, following the market's close on Wednesday, announced that it had also topped per-share expectations by $0.25. It further guided earnings-per-share expectations for the full year above the current consensus. Beyond that, I'll be awaiting the results next week from Amsterdam-based agriculture and construction equipment manufacturer CNH Global (NYSE: CNH  ) , along with those from Deere (NYSE: DE  ) , which will take center stage in mid-August, and mining equipment manufacturer Joy Global (NYSE: JOY  ) , a late August reporter.

Meanwhile, I'd suggest that you simply click here to add Caterpillar to your individualized version of The Motley Fool's My Watchlist. The industry's big enchilada is clearly worth your attention.

Fool contributor David Lee Smith doesn't own shares of any of the companies named in the article. The Motley Fool owns shares of Joy Global. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days


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