Caterpillar: Ready To Move On Bucyrus Acquisition

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have a fondness for companies that make things, that take raw materials, and transform them into finished product with values far greater than the cost of the materials that went into them. Those types of companies are what built America. A couple of those kinds of companies released earnings this week, Caterpillar (NYSE: CAT) and Boeing (NYSE: BA). Let’s take a look.

I have long been a fan of Caterpillar. I mentioned it back in January as one my five favorite stocks for 2012. Its first quarter earnings report has done nothing but reinforce that belief. Caterpillar reported revenues of $15.98 billion, up 23% from the same period last year, and profits of $1.59 billion, or $2.37 per share, were up 29% year over year. When compared with analysts' expectations earnings were about 11% above the mean forecast of $2.13 per share, but missed by $200 million the revenue estimate number. For that, the stock is being punished as it is down almost five percent on the day. It is a strange world.

Wall Street is concerned about Caterpillar in China. China's annual growth had been, for the last several years, in the area of about 10%, buoyed by massive infrastructure projects such as the recent Summer Olympics in Beijing. In the first quarter of 2012, China's estimated growth fell to 8.1%. Caterpillar had made China the centerpiece of its developing market strategy. Any kind of a hard landing in the Chinese economy will have a substantial impact on Caterpillar's future revenues. I do not expect any sort of substantial slowdown, but such a scenario is possible in China.

Caterpillar also revised its guidance in a way that gives me pause. The company did not change its revenue estimate for the year, which is from $68 billion to $72 billion. It did, however, up its earnings forecast, from $9.25 per share to $9.50 per share, assuming $70 billion of revenue. It just so happens that the first quarter's result earnings were about $0.25 above predicted results, which means Caterpillar management did not really up the earnings forecast at all, rather, it simply took into account the success of the first quarter.

In management's discussion of the first quarter, it offers that slowdowns in China and also Brazil are being more than compensated for by growth in the United States. Management, and this writer, do not expect prolonged economic slowdowns in China or in Brazil. And I believe management is effectively allocating resources in those countries in anticipation of substantial future growth in those economies.

The rest of the story of the first quarter, or for that matter, for all of 2012 is Caterpillar's $8.8 billion purchase in 2010 of Bucyrus, a leading domestic manufacturer of mining tools and machines. That purchase catapulted Caterpillar into a leadership position in the mining industry, and will be accretive to earnings no later than the second half of this year. It is already accretive to operating earnings. More recently, Caterpillar has purchased ERA Mining for about $900 million, boosting Caterpillar's Asian mining machine building capabilities.

Caterpillar is in a boom or bust business. It has a current five year PEG of 0.65, indicating it is undervalued. It has an over $30 billion order backlog. The cycle is midway through the upside, and it is not too late to get on board with this leading, and cheap, maker of machines that are in demand worldwide.

Caterpillar has competition in most parts of the world. Its two leading domestic competitors are Deere (NYSE: DE) and Cummins (NYSE: CMI), both fine companies in their own rights. But both of these companies are more limited in their products; Deere focusing on agriculture, and Cummins focusing on power systems. Caterpillars' breadth across all areas of construction and mining sets it apart.

Shifting towards aviation, Boeing is a leading, worldwide provider of commercial jet airliners, business jets, and military aircraft. Roughly half its sales are overseas. In the first quarter of 2012, Boeing followed form on the vast majority of companies this earning season by bettering last year's and analysts’ projections for the quarter by healthy amounts. Revenues of $19.4 billion were 30% over the same quarter of 2011, and an even $1 billion more than Street estimates. Profits of $1.11 per share beat Street estimates of $0.94 per share. Last year's first quarter earnings were $0.90 per share.

Things are going well now at both the civilian and the military units. Highlighted by its first ever sales of fighter jets to Saudi Arabia, defense revenues rose 8%, and profits were up 11% from the year earlier. Competitors Northrop Grumman (NYSE: NOC) and General Dynamics (NYSE: GD), both far more heavily weighted toward defense than Boeing, both are struggling with anticipated military spending cutbacks.

It is the commercial side that really sets Boeing apart. Revenues on the commercial side increased 54% from the year ago levels to nearly $11 billion. Boeing also reported a backlog at the close of the first quarter of some 4000 airplanes, valued at over $300 billion.

I only see two pressing issues in Boeing's ointment right now. The first is the rumored merger talks between moribund US Air (NYSE: LCC) and bankrupt AMR Corporation. US Air uses mostly non Boeing aircraft, while AMR uses now nearly exclusively Boeing aircraft. The loss of AMR in an acquisition would likely cost Boeing a long time and loyal customer. The second is that its pension plan is grossly underfunded, to the tune of $15 billion. The company plans to contribute at least $1.5 billion to its pension plan this year, which will be a big hit against earnings this year. 

Boeing is selling now with a 5 year PEG of 1.24, indicated a roughly fair valuation of the company. But I am very confident that a year from now, Boeing will be worth far more than it is today. In the meantime, enjoy the market average, 2.4% dividend yield. Please look into Boeing more carefully.

StockCroc1 has no positions in the stocks mentioned above. 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.

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