Caterpillar Is Still Worth $95 Despite Cutting Its Earning’s Outlook

by Trefis Team
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Caterpillar
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Caterpillar (NYSE:CAT) on Tuesday cut its earnings guidance range from $15-$20 per share to $12-$18 per share for the year 2015. [1] This led to a decline of nearly 5% in the stock of the company by the end of trading on the day. The cut has been guided by declining mining activity globally due to softening of metal and iron-ore prices. Major mining companies including, Vale (NYSE:VALE) , BHP Billiton, Fortescue Metals Group (FMG), among others have lowered or plan to lower their spending for 2013-2014. And, as mining business constitutes nearly 42% of the total value of Caterpillar, the slowdown in the industry is expected to impact the company significantly in the short-term.

However, the sector continues to hold its long-term growth factors of increasing global urbanization and growing energy demand from emerging economies. And thus, we anticipate the mining business of Caterpillar to recover post its current short-term slowdown, and drive growth for the company over the long-term.

We currently have a stock price estimate of $95.44 for the company, nearly 10% above its current market price.

See our complete analysis of Caterpillar here

Slowdown in mining activity in the short-term

The weak global economic environment, particularly the slowdown in China’s economic growth over the past three to four quarters, and the sovereign debt crisis of Europe has caused prices of several base metals and iron ore to decline. Iron ore prices have declined from $178 per metric ton in September last year to $108 per metric ton currently. [2] Copper prices have also moderated from their levels in the first quarter of 2012. [3]

As a result, investments in mining activity have declined. Australian iron ore producer FMG cut its full-year capital expenditure by 26% to $4.6 billion on September 4, BHP Billiton, the world’s largest mining company delayed projects worth $68 billion, and Vale plans to cut its spending by 4% in 2013. [4] This has impacted the demand for mining equipment and machinery manufactured by Caterpillar and other mining equipment manufacturers, causing them to lower their earnings forecast over the short-term.

Mining industry to post growth over the long-term

However, the growth factors of the mining industry – increasing global urbanization and growing demand for energy from emerging economies will drive investment and growth in the industry over the long-term. In a related development, GE (NYSE:GE) recently launched its mining business, GE Mining, and it expects the unit to add significant growth to the company’s top line over the long-term. [4]

Thus, in spite of the current weakness in the global mining industry that has forced Caterpillar to lower its earnings guidance, the long-term attractiveness of the mining sector remains intact. And, the mining business will drive earnings growth for Caterpillar over the long-term.

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Notes:
  1. Caterpillar Inc. (CAT) Falls After Cutting 2015 Forecast; USB Maintains A ‘Neutral’, September 25 2012, www.ibtimes.com []
  2. Iron Ore Monthly Price – US Dollars per Metric Ton, www.indexmundi.com []
  3. Copper graphs – London Metal Exchange, www.lme.com []
  4. GE Sees Sales Entry as Miners’ Cutbacks Hit Caterpillar, September 25 2012, www.bloomberg.com [] []
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  • commented 2 years ago
  • tags: GE VALE CAT
  • I don't get all this talk about CAT lowering estimates.. that was only for 2015! The CEO stated that 2013 should look about the same as 2012 (not lower).. see this:

    Caterpillar Inc. ( CAT ) reported record results in the second quarter 2012. The company's Equipment sales improved 23% year over year. The company raised its 2012 profit per share expectation from $9.50 to $9.60 on better demand forecasts.

    Read more: http://community.nasdaq.com/News/2012-09/machinery-stock-outlook-sept-2012-zacks-analyst-interviews.aspx?storyid=177259#ixzz27huAzYKj