Caterpillar: A Strategic Approach To Acquisitions And Economic Diversification

Apr.30.12 | About: Caterpillar Inc. (CAT)

In spite of global economic risk, Caterpillar Inc. (NYSE:CAT) has been very strategic in its approach to acquisitions and overcoming economic adversity. With the purchase of Bucyrus in 2011 and its strength in global diversification, Caterpillar is expecting record breaking results in 2012.

In Q1 2012, Caterpillar reported a revenue and sales increase 23% to $15.981 billion, up from $12.949 billion. CAT also reported profits of $1.586 billion, or $2.37 per share, which is up 29% from a year-earlier when Caterpillar reported a profit of $1.225 billion, or $1.84 per share. The core of the growth came from the resource segment which reported significant gains in Q1 aided by the Q3 2011 acquisition of Bucyrus International Inc.

Caterpillar had particularly strong growth in the resource segment in Q1. The resource segment reported Q1 sales and revenues of $4.778 billion, up 73% from Q1 a year ago when the resource segment reported sales and revenues of $2.768 billion. There were two main reasons for the growth in the resource industries segment. They were the acquisition of Bucyrus in Q3 2011 and organic growth. Mike Dewalt stated in Caterpillar's Q1 2012 report:

The addition of Bucyrus added a little more than 36% to Resource Industries and organic growth in the rest of the business also added a little over 36%.

The acquisition of Bucyrus added $1.001 billion in sales and revenue to the company in the first quarter of 2012. Of the $1.001 billion, $273 million of the sales were in North America, $174 million in Latin America, $181 million in EAME and $373 million in Asia/Pacific. Mike Dewalt also stated in regards to the resource segment:

Sales were up substantially in the quarter. Orders were up and lead times for large mining trucks remained extended, with most models being quoted into 2014. In addition, our Resource Industries' order backlog increased during the quarter, for both legacy CAT products and new Bucyrus machines.

Even though Caterpillar has had a very strong start to 2012, the company has concerns about global economic uncertainty especially as it relates to China. The company has revised its expected sales from China and Brazil due to economic slowdown but believes those sales lost from China and Brazil will be made up by increased sales in North America and in particular the U.S.

Sales of construction equipment in China have been weaker than we previously expected, and we have revised our forecast down in China. While we have seen some evidence of improvement in Brazil, it is not occurring as fast as we expected, and we have also revised our full-year expectations down for Brazil. However, stronger sales in North America are expected to about offset reductions in China and Brazil.

Caterpillar Inc. (.PDF under 1Q12 Catepillar results)

Because of Caterpillar's global diversification the company has insulated itself from an economic slowdown in one or two regions of the world.

Another concern for Caterpillar is the risk of Inflation. There is concern that the recent rise in oil prices will trigger concerns about inflation. With inflation comes the concern over the need to tighten monetary policies. Caterpillar stated in its 1Q12 report (.PDF):

We believe many economies are too fragile to withstand another round of tightening. Premature tightening could lead to slowdowns in growth similar to those that occurred in 2011 and could jeopardize recoveries in our sales.

Even with concerns of an economic slowdown in China and Brazil or inflationary pressures due to rising energy prices, Caterpillar has positioned itself well to report strong earnings in spite of these factors. Caterpillar is expecting sales and revenues for the year at between $68 to $72 billion. Caterpillar is also expecting to earn approximately earn $9.50 per share in 2012.

1. Estimated Sales = $70 billion

2. Estimated Profit Margin = 8.79%

3. Profit = $6.153 billion

4. Shares Outstanding = 652.50 million

5. Estimated EPS = $9.43

6. Forward P/E = 12.67

Cat - Caterpillar Inc - Stock Price Target for 2012 = $119.47 USD

Action Analyst Rating Price Date
Target Barclays Capital Overweight $133.00 « $131.00 04/26/12
Maintain S&P Research Buy $145.00 04/17/12
Upgrade Longbow Buy « Neutral $132.00 04/16/12
Downgrade Bank of America Neutral « Buy $135.00 04/16/12
Target Raymond James Outperform $130.00 « $140.00 03/21/12
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CAT over the next 72 hours.