Keep an Eye On the Big Cat
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Caterpillar (NYSE: CAT) is the icon of construction yards, the focal point of new buildings, the crux of the mining industry, and a Wall Street darling. The Big Cat may not be the perfect stock (no one is), but it is definitely one to watch.
Improved spending on machinery and equipment improved orders for manufactured goods in December, a positive sign for the economy, proven perfectly by Caterpillar, the world's largest maker of construction and mining equipment.
Caterpillar’s outperformed Wall Street predictions as its fourth quarter profit rose by 60 percent, sending its shares higher. CAT reported a net income of $1.55 billion, or $2.32 per share, up from $968 million, or $1.47 per share, in the same quarter last year. Sales and revenue jumped 24 percent to $17.24 billion from $12.81 billion.
According to the Commerce Department, orders for durable goods rose 3% in December. And core capital goods (such as large machinery) rose to an all-time high. Experts monitor the purchase of core capital goods, such as computers and machinery, as they are good indicators of future business investment plans. Factory orders rose 1.1% following a 2.2% gain in November, the Commerce Department reported today. For all of 2011, total orders were up 12.1%, compared to a gain of 12.9% in 2010. Both numbers are optimistic over the decrease in of 22.1% in 2009.
Shareholders have more reasons to be optimistic about the future as Caterpillar expects a 2012 profit of $9.25 per share and $68 billion to $72 billion in revenue in 2012. Caterpillar shares continue to rise daily, and were at $113.01 (+2.68) as of 1 p.m. Friday.
Demand for manufactured goods rose a promising 2.9% in December, and orders for core capital goods to a record $68.9 billion. The overall December rise in orders for durable goods was led by an increase of 18.9% in demand for commercial aircraft. Demand also increased for primary metals such as steel, machinery and communications equipment.
But has the improved capital goods market paid off for Caterpillar's competition?
Deere and Co (NYSE: DE), which manufactures agricultural equipment, commercial and consumer equipment, construction and forestry, and credit, enjoyed an overall strong year for 2011. Deere launched new advances in agriculture equipment, and opened a new factory in India. They show no signs of slowing down production with more facilities and expansion expected internationally in 2013. Dividend investors appreciate the increasing quarterly dividends (raised twice last year).
Manitowoc (NYSE: MTW) a manufacturer of engineered capital goods and support services in several market segments, including cranes and other heavy equipment, is expanding in China and India. Caterpillar is also expanding in India, and has announced expansion plans in China.
Overall the core capital goods market is improving worldwide, not just in the United States. Caterpillar expects the global economy to grow about 3.3% this year, with the United States economy expanding at least 3%.The company also expects construction spending in the US, which has been declining since 2004, to recover.
If the worldwide trend towards making core capital good purchases continue, which it appears it will, this is a great time to buy Caterpillar, and other large machinery manufacturers. Investors should closely look at the debt ratios of these large manufacturers before proceeding. Large debt from expansion plans is a serious threat to profit. But overall, if the economy continues to improve and companies are able to purchase capital goods, this is the time to invest in core capital goods manufacturers.
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