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Can Caterpillar's Amazing Run Continue?

This time last year, if you'd asked me what the Dow's best performer during 2014 would be, Caterpillar (NYSE: CAT  ) would not be my answer.

However, during the first six months of this year, Caterpillar has outperformed all of its Dow peers. The question is, will this outperformance continue?

Sentiment improving
After a dismal 2013, Caterpillar's shares have put in a good performance during the first six months of 2014. This performance can be traced back to a strong performance at the company's construction and power businesses within the US and around the world. What's more, many analysts believe that Caterpillar's overall outlook is improving.

Indeed, according to Caterpillar's most recent dealers' survey, 95% of the dealers surveyed were exceeding their year-to-date sales forecasts. Dealers now expect year-on-year sales for full-year 2014 to have expanded 8% to 12%, compared to the 5% to 7% initially forecast.

Unfortunately, according to the dealers' survey, the demand for mining equipment is still nonexistent. Most of the demand reported was for construction equipment, for use within the housing sector. Other construction sectors also showed strength. Government machinery orders reminded depressed but appeared to have bottomed.

Additionally, dealer inventories remain low, and dealers are already concerned about lead times across multiple lines of equipment. Used equipment remains hard to come by, and the demand for rental equipment is rising.

There are two main takeaways from this survey. Firstly, rising demand for rental equipment means that equipment demand is rising but companies are reluctant to spend, or commit to investment. Secondly, low levels of second-hand equipment imply that customers are reluctant to spend, and upgrade.

All in all, it would appear that there is demand within the market. However, customers are unwilling to flash the cash, as soon as they do, it's likely that Caterpillar's outlook will quickly change.

International worries
On the other hand, internationally, Caterpillar is struggling. According to analysts' notes on the matter, the Indonesian market "remains challenged on mining;" additionally, "China is worse," while "Canada remains soft."

Other data has shown that Australia, usually a bright spot in the global economy, was reporting double-digit declining levels of capital spending.

According to Australia's Bureau of Statistics during the first quarter of this year, total business investment in new buildings and equipment fell 4.2% year on year with the mining industry leading the declines.

Some good news
But it's not all doom and gloom for the international mining equipment sector. Joy Global (NYSE: JOY  ) , Caterpillar's smaller international peer, reported a solid set of fiscal second quarter results at the beginning of June.

The company beat Wall Street estimates by $0.05 per share. In part, this higher figure was down to a rise in servicing income. Demand for equipment maintenance has picked up in 2014 after miners put off servicing for more than a year. Service orders rose about 8% during the quarter.

However, the company still suffered from a fall in the demand for its equipment. Year on year, total equipment orders fell 7% to $1.05 billion, although this was up 22% from the first quarter.

With the company warning that the market remains weak, this solid fiscal second quarter performance might not be repeated.

Foolish summary
So overall, Caterpillar, the patient, is recovering well, buoyed by rising demand for construction equipment. However, the mining industry is still reluctant to spend and Caterpillar, as a company which generates the majority of its income from the manufacture and sale of mining equipment, will continue to suffer.

Still, the company's recovery is well under way, and when customers start to spend again, earnings should surge. Nevertheless, until customers do start to spend again, it is unlikely that Caterpillar's outperformance will continue.

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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Related Tickers

9/1/2015 1:57 PM
CAT $74.93 Down -1.51 -1.98%
Caterpillar, Inc. CAPS Rating: ***
JOY $22.60 Down -1.62 -6.69%
Joy Global, Inc. CAPS Rating: ****