Caterpillar: Buy, Sell or Hold?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A Positive Quarter
As the market for construction in the US, Europe, Brazil, and China begins to slow amidst a global slowdown of the world’s richest economies, the world’s largest construction and mining equipment company Caterpillar (NYSE: CAT), managed to post a 29 percent rise in growth in their first quarter profits for this year. A set of attributable factors accompany the decision including the decision by many American companies to replace older equipment with new machinery, with purchases being made for larger improved equipment, in comparison to Chinese customers who lead percentage wise on smaller purchases with lower margin equipment. Net earnings ended the quarter at $1.6 billion, or $2.37 earnings a share, in comparison to the same period last year of $1.2 billion, with $1.84 earnings per share. Mining and resource segments saw a 73 percent increase in earnings, coupled with a 46 percent jump in earnings, aided by the company’s decision to purchase Bucyrus International, making it the world’s largest mining company. Operating efficiencies are expected to increase anywhere from $50 to $100 million resulting from the acquisition, according to the S&P.
While expectations of the Chinese economy are still expected to slow the country made a surprise announcement lowering borrowing and deposit interest rates for the first time since 2008. The company saw big gains today on the news being a significant contributor to the Dow’s growth of .79 percent as of this writing. The company’s share price saw growth of 1.95 percent, making it the fourth highest stock on the exchange.
The party was cut short when US Fed Chairman Ben Bernanke dimmed hopes of increased stimulus for the US market, while speaking to a congressional committee. While citing plans to take action if necessary, he signaled no imminent plans. Despite this stock ticker for mining companies like U.S. Steel Corp (X), and Freeport-McMoRan Copper & Gold Inc (FCX), saw growth both 1.4 percent, and .6 percent, respectively.
Profit through Exports
Concern over the slowdown of the emerging growth markets Brazil, and China has been offset by growth in local markets. Additionally President Obama extended government funding for the Import Export Bank by $40 billion, in an attempt to double American exports in the emerging markets of South Korea, Columbia, and Panama, which recently were recipients of new free trade agreements. The bank nearly missed the extensions amid protestations from Tea Party supporters concerned about ballooning government deficits. Top recipients of Bank funding include Boeing (NYSE: BA) and Caterpillar.
As an organization, Caterpillar has proven to adapt its sales in the global economy to seek opportunities in other markets when a set discovers slow down or sluggishness. By utilizing free trade agreements intended to boost exports, the company should enjoy higher profit margins and reductions of tariffs. The US Chamber of Commerce estimates the agreements to have a $42.6 billion impact on American exports, based on conservative trade agreements previously signed.
Buy or Sell?
The company has also increased its profit outlook from $9.25 a share to $9.50 a share, with projected revenues up conservatively $2 billion. I expect the trend of American companies replacing equipment with newer high margin equipment to continue coupled with further tax aided subsidies ensuring continued growth, as outlined by company projections. With the increase in mineral prices continually rising the company’s purchase of Bucyrus International shines as companies like BHP Billton , Peabody Energy Corporation (NYSE: BTU), and Consol Energy (NYSE: CNX) seek to purchase better extraction methods. Improved Interest rates for the Chinese market should stimulate increases borrowing for equipment coupled with growth in the mineral extraction industry. The company recently won a $776 million contract from the Defense Logistics Agency. Similar manufacturing providers such as Deere & Co (NYSE: DE) see positive growth but fail timeliness and growth analyses. CAT proves to be a worthy purchase for its long term outlook and ability to seek revenue from other markets. In my line of thought and recommendation, this stock is a good buy.
muhammadbazil owns shares of Caterpillar. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.