Global mining and construction equipment manufacturer Caterpillar (CAT) presented some interesting insights with respect to its own business as well as the global economy at the MINExpo conference Monday afternoon.
The firm offered a tempered outlook on the global economy, citing the risk of recession. The firm expects some uncertainty as it relates to the fiscal cliff in the U.S. and expects European leaders to do the bare minimum to mitigate widespread depression across the Eurozone. However, Caterpillar sees conditions improving in Brazil and believes new policies in China will result in growth returning in late 2012 and early 2013. As a result, Cat's disaster-case earnings per share forecast in 2013 is $3.50.
Oddly, the firm reduced its 2015 earnings outlook to $12-$18 per share from $15-$20 per share. We understand the firm may be concerned about global economic growth, but we don't think the company needed to lower its long-term forecast. We think it's fair to say that it is near impossible to gauge where the economy will be in 2-3 years, even in the mining business where capital projects could take years to complete. Investors should certainly interpret this revision directionally as it relates to business conditions, but 2015 earnings are far from set in stone (as the wide range indicates).
It also appears the Bucyrus integration is going mostly as planned, but it hasn't been as accretive as the firm would have liked. Global mining capital expenditures could remain depressed for the next few years. As a consequence, the price paid for the Bucyrus acquisition might continue to look high as near-term returns may be muted. And if GE (GE) scoops up Joy Global (JOY) at a reasonable price in the next several months, there will certainly be more rhetoric surrounding the deal price of Bucyrus. Regardless, we continue to like the long-term fundamental story of the mining industry, and we think Bucyrus will yield positive results in the years to come.
Though we agree the global economic growth forecast looks challenged, shares of Caterpillar are undervalued at current levels. For a read on how we calculate the intrinsic value of Caterpillar and other companies in our equity coverage universe, please click here. The company has done a fantastic job managing costs, and we think the Bucyrus acquisition will be a long-term positive. Still, shares score just a 3 on the Valuentum Buying Index (our stock-selection methodology), so we're waiting for technicals to improve before considering shares in the portfolio of our Best Ideas Newsletter.