Caterpillar Posts Strong Q2 Earnings Despite Global Growth Concerns

Caterpillar (NYSE:CAT) released its second quarter earnings and posted revenues of $17.4 billion in the second quarter, up $3.1 billion or 22% compared to the year-ago quarter. ^[1] The rise was attributable to higher sales volume across all its industrial businesses, better price realizations and acquisitions. Profit for the quarter was $2.6 billion, up $1.0 billion or 63%, on a year-over-year basis as the acquisitions contributed to earnings. The solid performance was marginally offset by lower sales of construction equipment in China due to monetary tightening by government of China in order to control inflation, and continuing economic slowdown in Europe.

We currently have a price estimate of $111 for the company, approximately 30% above its current market price.

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Rising sales volume and higher price realization across divisions

Sales increased by $3.1 billion in the second quarter compared to the year-ago period. Roughly half of that increase was attributable to acquisitions – $1.2 billion through acquisition of Bucyrus International and $200 million through acquisition of Motoren-Werke Mannheim Holding GmbH (MWM). The remaining was attributable to increased volume and higher price realizations across all industrial businesses of the company namely, construction, mining and power systems.

The highest increase in sales occurred in North America among all geographies driven in part by improving construction activity but also to equipment and fleet upgrades. This was partly offset by slowdown in construction equipment sales in China. The government of China has been tightening its monetary policy to cool real estate prices within a larger objective to control inflation. As a result, demand for Caterpillar’s construction related products has declined significantly in the nation.

In the mining industry, even though commodity prices for metals and coal have declined compared to their year-ago levels. They are still holding at levels that are attractive for investment. This ensured increased mining activity, resulting in higher sales of Caterpillar’s mining equipment and machinery.

In the power systems business that manufactures and sells a variety of engines and diesel-electric locomotives, sales were driven by petroleum and rail applications. Rising worldwide demand for energy at prices that sustain investment has resulted in higher sales of engines used in oil drilling and petroleum applications. Also, higher demand for locomotives resulted in increased volumes and better price realizations.

A combination of all these factors resulted in the impressive sales and profit growth that Caterpillar has posted in the second quarter.

However, the uncertain macro economic environment particularly, the continuing economic slowdown in Europe and slowing growth in China, poses a challenge to Caterpillar’s growth over the short-term.

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1. Caterpillar Reports Best Quarter in History and Raises 2012 Profit Outlook, July 25 2012, www.caterpillar.com [↩]