Caterpillar (CAT) reported strong second quarter results last week. Sales and profit per share both set an all-time record in the period, advancing 22% and 67%, respectively, from the same quarter last year. The company narrowed its outlook range for sales and raised its outlook for profit during 2012. Specifically, management believes revenue will now be in the range of $68 to $70 billion (was $68 to $72 billion) and earnings to be about $9.60 per share during the year (was $9.50 per share). Caterpillar indicated that the reduced top-line forecast largely reflects currency headwinds a more conservative stance regarding the global economic outlook, while the improved bottom-line outlook represents better underlying operating performance (cost containment).
Though we don't typically reproduce quotes from press releases, we think the following comments by CEO Oberhelman shed some light on why the firm does not believe the current economic situation is anything like the Financial Crisis of 2008:
"Caterpillar's success in 2012 is occurring despite U.S. construction activity that remains depressed and well below the prior peak, the problems facing Eurozone economies and economic concerns in China," Oberhelman said. "While we're expecting a record year in 2012, we understand the world is facing economic challenges, and if it becomes necessary, we are prepared to act quickly as we did in late 2008 and 2009. While we're prepared, the good news is, this doesn't feel like 2008. Interest rates are low, central banks are prepared to inject more liquidity if needed, and housing is coming off lows, not a peak, and seems to be improving," Oberhelman added.
Overall, Caterpillar put up a nice quarter, and we think management remains poised to act should global economic conditions deteriorate. We also think Caterpillar is the most attractive risk-adjusted idea within the agricultural equipment industry. At this time, the company is the only one in a group that contains Deere (DE), Joy Global (JOY), AGCO Corp (AGCO), CNH Global (CNH) and Terex (TEX) that is undervalued on both a discounted cash-flow basis and a relative value basis. We'd look to pick up some of Cat's shares on improving technical/momentum indicators, which would drive a better score on our Valuentum Buying Index.