Will Caterpillar Turn it Around?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recession in Europe and the economic slowdown in the US and China didn’t hold back Caterpillar (NYSE: CAT) from presenting modest growth in revenues in the third quarter financial reports. Nonetheless, the company still revised down its revenues and profits per share for 2012. Further, the company doesn’t expect a sharp improvement in its total sales in 2013. With little expectation for growth, will the company’s stock recover from its tumble during April and May? Let’s examine Caterpillar's financial situation, breakdown its business situation in Europe, China and U.S, and figure out if the company will bounce back by the end of the year.
According to the third quarter financial reports, the company’s revenues rose by 4.6% compared to the third quarter of 2011, but declined by nearly 5.3% compared to the second quarter of 2012. The company’s operating profitability remained high at nearly 15.8% – mainly due to little change in the company’s operating costs. The main sector that rose during the third quarter was the resources industry with a 13% growth in sales compared to Q3 2011, followed by power systems that rose by 5%. Revenues grew in the North America region by nearly 9% during the quarter; the Asia/Pacific region’s sales rose by 8% despite the decline in sales in China. Other regions’ revenues remained nearly flat.
The recent decision of the Chinese government to expand its investment in infrastructure, in particular its decision to spend over $150 billion in infrastructure projects, could help rally Caterpillar’s sales in China in the years to follow. This stimulus package, however, might not be enough to pull up China’s economy, an economy with over $7.3 trillion in GDP. This means, the stimulus is only 2% of China’s total GDP. Therefore, even if the company’s sales in China will rise, I still think they won’t improve by much. In any case, the effect of the stimulus isn’t likely to reflect in the company’s sales in 2012.
In the US the economic situation has improved and it’s also reflected in the company’s sales. The construction industry in the US has risen by nearly 23% during the quarter. This upward trend may continue in the months to come. The housing starts hiked by 15% during September. Further, the recent decision of the FOMC to launch QE3, in which the Fed will purchase mortgage backed securities at a pace of $40 billion per month, might also induce growth in demand for housing. These two items suggest that the housing market might continue to improve and so the company’s growth in the construction segment will continue.
In Europe the situation hasn’t improved and is likely to continue for the rest of 2012 and perhaps even 2013. This means that the slow growth in sales for Caterpillar in Europe is likely to persist in 2013.
Despite the company’s positive results, the stock is still down for the year. The chart below demonstrates the movement of S&P500 index and Caterpillar in the past several months. The prices are normalized to the beginning of April. As seen, even though the S&P500 hasn’t performed well and only edged up by 1% during this period, the stock price of Caterpillar has done even worse and declined by 11.5%. During the year the company’s shares have declined by nearly 10%.
The movement of the company’s stock is also strongly linked with shifts in the market: during September and October the linear correlation between the S&P500 index and shares of Caterpillar reached 0.76. This means that nearly 58% of the company’s stock volatility could be explained by the shifts in the S&P500. Nonetheless, this relationship didn’t seem to help pull up the company’s stock in recent months.
Caterpillar has at least been paying a slightly higher dividend yield than its major competitors or similar companies in related fields: Caterpillar is currently offering a quarterly dividend of $0.52 per share which represents an annual yield of 2.46%. In comparison, Cummins (NYSE: CMI) is offering a quarterly dividend of $0.5 per share which comes to an annual yield of 2.15%; Deere & Company (NYSE: DE) is paying a quarterly dividend of $0.46 per share which represents an annual yield of 2.15%.
On the other hand, Caterpillar is still in the middle of the pack when comparing its operating profitability to other related companies. As seen in the chart below, Caterpillar’s operating profitability was slightly higher than Deere’s but lower than Joy Global's (NYSE: JOY) operating profitability. The chart also shows that Caterpillar’s profitability in the third quarter was the highest in the past five quarters (the other companies didn’t released their quarterly reports of the past three months).
Therefore, even though Caterpillar is offering a slightly higher dividend yield it still hasn’t done much better than these related companies.
The bottom line:
There are some positive signs of growth for Caterpillar in the US, mainly in the construction market but the slow growth in China and the rescission in Europe are likely to hold back the company from reaching higher revenues. Therefore the company’s stock might not recover from its tumble in the previous months.
For further Reading see: Why Caterpillar isn’t pulling up? Just blame it on the Oil
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