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Record profits and record full-year outlook? Whoa! Pinch me, is it true? When cut backs and caution and slowdown are all I am having for breakfast day in and out, Caterpillar (NYSE: CAT) blew me up with phenomenal second-quarter numbers, throwing all doubts, concerns and pessimism out the window at one go.
It surely can’t get any better. Cat has proved its mettle, and I can’t think of a single reason why it shouldn’t be a part of any prudent investor’s portfolio.
Cat’s second-quarter sales and profits were its highest-ever in a quarter, resulting from a whopping 22% jump in top line and a massive 67% surge in bottom line from the year-ago period. Despite crisis in Europe, slowing emerging markets and subdued construction and housing activity levels in the U.S., how did Cat pull off this feat? Excellent global reach, strong sales and support systems, and timely execution and management are the answers.
When most have raised the yellow flag on the prospects of the mining industry (in the short term at least), Cat’s mining business defied all by stealing the show with a 68% jump in sales. Cat says metal and mining commodity prices remain at levels lucrative enough to induce investment—a factor that boosted sales. I had touched upon a related point recently when I presented a bullish case on rival Joy Global (NYSE: JOY), mentioning how a commodity like coal continues to be highly demanded in critical markets like China and Europe. Joy’s shares tanked to a 52-week low on mining slowdown concerns.
Though resource industries division (which constitutes 80% mining) is not its largest, Cat is betting big on it. Acquiring mining giant Bucyrus last year is probably the best example, and integration seems to be on track. Bucyrus accounted for 37% of the total jump in the division’s sales during the last quarter. The acquisition has taken Cat a notch above Joy, making it a bigger player in terms of total mining product range. Operating margins for this division remain higher than the others, and Bucyrus should only add to it in the future.
Sales in Cat's largest division, construction industries, rose 8%, with most of it coming from North America. An uptick in construction activity and replacement demand were key factors, which were also evident in peer Terex’s (NYSE: TEX) second-quarter top line, which rose 35%. Terex, in fact, even hired 500 employees some time back to cash in on rising replacement demand.
If Cat can keep its chin up in such trying times, one can imagine what heights it can attain if demand in important markets picks up. China, in particular, has been under a shroud of slowdown concerns. Not that Cat depends a great deal on the nation -- it derives roughly 3% of its revenue from there. But it is investing heavily in the world's largest construction equipment market. Slowdown has prompted the company to cut back production, and also plan offers and deals to clear inventory the pile up.
But Cat is one of the few companies that never panicked and remained bullish about China. Chairman and CEO Douglas Oberhelman earlier even said how the slowdown was "the best thing" to have happened to China because the growth just did not seem to be at sustainable levels. With the company eying the leadership position and upping the ante in the market, a bounce back is all everyone is waiting for.
Above the ground
Caterpillar is not about mining or construction only. Sales in its third division, power systems, grew 12% from the year-ago period. If electric power generation is weak, Cat’s turbines, engines and rail locomotives, which find application in industries like oil and gas, continue to be in high demand. General Electric’s (NYSE: GE) transportation unit also posted a 27% rise in its second-quarter revenue backed by higher locomotive orders. Caterpillar is gradually raising the competition bar for GE by increasing production of diesel locomotives to capture the shifting trend from trucks to rails.
Cat is also strongly supporting use of natural gas as an alternative fuel. During the quarter, it made headway in its drive to power its trucks and locomotives on gas by striking a deal with the best and most favored in the field, Westport Innovations (NASDAQ: WPRT). Cat’s financial strength and Westport’s cutting-edge technology and expertise will come together to develop high horsepower natural-gas fuel systems for use in off-road vehicles. It will be the first of its kind for the off-road market, and a development program between the companies is about to start soon.
The Foolish bottom line
Cat is best poised to make the most as mining and construction markets revive. It is hiring even during a downturn, and continues to penetrate deeper into the markets with new and advanced products. Its management excellence is also reflected in the fact that despite nearly 800 workers on strike for close to 3 months, the company hasn’t missed any delivery deadlines, nor is it facing any serious fall back in production. So massive is Cat’s business scale that shifting operations or hiring temporary workers comes easy.
Caterpillar’s capital expenditure budget for the year remains the same, and it is targeting record profits for the full year—facts that speak volumes of its fundamental strength. If cyclical stocks scare you, Cat should make you rethink. It will stay at the top of its game, and at a P/E of 10 times, I think it’s every bit worth the greenback.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Westport Innovations. 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.