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Like two grizzled gunslingers, the two biggest names in manufacturing face off at high noon, and this town ain't big enough for the both of them. So which company will win? The world-famous Caterpillar (NYSE: CAT ) , renowned for their bright yellow machinery and fantastic second-quarter earnings? Or will it be Deere (NYSE: DE ) , Caterpillar's arch nemesis and green counterpart? Let's find out.
How's CAT right meow?
We'll begin with Caterpillar, the "world's leading manufacturer of construction and mining equipment." In case you have never seen its construction vehicles along a highway or at a building site, Caterpillar is everywhere. In fact, the company is so well entrenched in construction around the globe that it's considered a bellwether for manufacturing worldwide.
Right now Caterpillar does a lot of business in emerging markets, particularly India and China. As these countries build their infrastructure, Caterpillar is right there alongside them, shoveling dirt and raking in dough. Unfortunately, those promisingly profitable countries have slowed down their growth, just like the rest of the world, which in turn has slowed Caterpillar's growth. As a result, the stock has declined more than 30% since its 2012 high of $115 in March, and many analysts had written the company off by the time last week's earnings report rolled around. Boy, were they wrong.
Here kitty, kitty
Early last week, Caterpillar shocked the world by posting record profits. In the second quarter of 2012, Caterpillar increased net income by 64% and grew revenue by 21%. All of that led to earnings of $2.54 per share, a huge surprise to analysts -- and the company's highest quarterly profit ever. That's on top of Caterpillar increasing its dividend in June to $0.52 per share, up from $0.46, welcome news for all the income investors out there. Thanks to the great earnings news, Caterpillar's stock shot up more than 2% on the day of the announcement.
The one caveat to all this great news was a decreased outlook for full-year revenue: Instead of the previous range of $68 billion-$72 billion, Caterpillar now expects somewhere around $68 billion to $70 billion. However, Caterpillar also expects higher profits this year thanks to better operating performance, and the company increased EPS estimates from $9.50 to $9.60.
So if manufacturing in emerging markets has slowed down so much, how did Caterpillar pull off this huge surprise? In the earnings call, Mike DeWalt, director of investor relations, noted that the largest growth came from Caterpillar's resource industries segment (mining). That division saw a 65% increase in year-over-year sales, half from organic growth and half thanks to last year's acquisition of Bucyrus International, a mining equipment manufacturer. If Caterpillar can keep up this growth going forward, the company will do just fine. But what about Deere?
And how was your day, Deere?
Joining Caterpillar in mortal combat is John Deere. Much like Caterpillar, Deere is committed to a lot of emerging markets, specifically Brazil, Russia, India, and China. Deere is known primarily for its agriculture and turf segment, which saw sales increase about 11% this past quarter. What people often forget about is the company's construction and forestry segment, in which sales increased 26%.
Speaking of earnings, Deere's earnings weren't as spectacular as Caterpillar's, but they weren't anything to scoff at, either. The company increased earnings per share 23% to $7.21, while net sales and revenue rose 12% just over $10 billion. Deere also grew net income by $1.05 billion in the second quarter of 2012, up 17% year over year, and the company expects equipment sales to increase roughly 15% in 2012.
Deere caught in CAT's headlights
Dividend Payout Ratio (LTM)
Net Margin (LTM)
Source: S&P Capital IQ. LTM = last 12 months.
When you line Caterpillar and Deere up next to each other, their financials mirror each others' so closely that it's tough to see the difference. But if you're paying attention, you'll notice that Caterpillar beat Deere in several important areas. Caterpillar increased its EPS by 67% (compared to Deere's 23%), boosted revenue 21% (compared to 12%), and grew net income 64% (compared to 17%).
Caterpillar is bigger and more profitable than Deere, but that doesn't mean it will win this duel without scuffing up its 10-gallon hat. The company will continue to deal with slowing growth in emerging markets, and the potential recession in China could land a solid blow on Caterpillar's bottom line. Caterpillar is also facing a strike in Joliet, Ill. from employees who are resisting pay freezes and higher insurance costs. While this is a contained strike, a win for Caterpillar's employees may embolden others as well; consequently, Caterpillar's bottom line could get hit.
Manufacturing may be down, but Caterpillar's not out. Most of its growth will continue to come from emerging markets, and if Caterpillar can handle a slowdown as well as it did in Q2, I'm not worried about it all. In the last quarter, the majority of Caterpillar's growth came from its mining division, while Deere's growth came from construction and forestry. If the companies focus on these two very different sectors, then maybe the town is big enough for the both of them.