Caterpillar Posts Strong Fourth-Quarter Results; Sees Global Economic Acceleration in 2012

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On Thursday, Caterpillar (CAT) reported strong fourth-quarter results and rounded out a very strong and record-breaking 2011. We’re comfortable with our $110 fair value estimate of Caterpillar, and we don’t expect to make any changes to it at this time.

Caterpillar’s fourth-quarter sales achieved an all-time quarterly record, increasing 35% from the same period in 2010. Machinery and Power System sales jumped 36% thanks primarily from demand for new equipment, while Financial Products revenues advanced a modest 3%. The company noted that the improvement in sales volume in the quarter occurred across the world in all geographic regions and in nearly all segments. Excluding its recent acquisition of Bucyrus, revenue jumped an impressive 24%. Caterpillar’s fourth-quarter profit came in at $2.32 per share, almost 60% higher than the $1.47 achieved in the same period a year ago. Excluding Bucyrus, profit jumped 53%, to $2.25 per share.  

Looking ahead to 2012, Caterpillar expects revenues to be in the range of $68 billion to $72 billion, with profit expected to be about $9.25 at the middle of the sales range—both sales and profit were ahead of what consensus was looking for. This outlook includes full-year results from its two major acquisitions—Bucyrus and MWM—and is based on its order backlog of nearly $30 billion at the end of the year, an all-time record. Caterpillar expects mining to continue to be strong globally and sales of new machines for construction in developed countries will improve as customers continue to rebuild fleets during the year. We note that the average age of machines in dealer rental fleets was historically high at the end of 2011.

The company also remains optimistic that orders from Europe will expand and that high oil prices will stimulate improvement in engine sales for electric power generation. Caterpillar also noted that overall dealer machine inventory was near historical levels relative to selling rates, with expectations that in 2012 dealers will add to inventories. Also embedded in the firm’s sales and profit outlook are improved price realization to the tune of 1% to 1.5%, reduced incentive compensation expense, and higher overhead and manufacturing costs that will scale with the higher revenue. 

We provide Caterpillar’s economic outlook for 2012 below:

2012 Economic Outlook

In general, prospects for economic growth have improved over the past quarter, and we expect the world economy to grow about 3.3 percent in 2012, a small improvement from about 2.8 percent in 2011.  In response to economic concerns, some central banks began easing policies late in 2011.  Underpinning our growth expectations for 2012, we expect this easing to continue and contribute to the improvement in growth.

Key points related to our economic outlook include:

  • We expect improving world economic growth to increase demand for commodities.  Our outlook assumes most commodity prices will increase slightly in 2012 and continue at levels that encourage investment.  We expect that copper will average over $4 per pound, Central Appalachian coal about $75 per ton and West Texas Intermediate crude oil about $100 per barrel.  
  • In the developed economies, capital investment recovered much faster than did overall economies.  This better performance occurred primarily because businesses had improved cash flow and better access to credit.  In addition, businesses let capital stocks depreciate significantly during the financial crisis of 2008 and 2009.  We anticipate business investment will continue to outperform other economic sectors in 2012.
  • We expect the U.S. Federal Reserve will maintain the Federal Funds rate below 25 basis points throughout 2012 and will not reduce the size of its balance sheet.  U.S. banks have record high capital ratios and considerable funds to lend.  We expect bank lending in the United States, which increased during the second half of 2011, to continue to grow in 2012.
  • Recent economic data suggests that U.S. economic growth improved in the fourth quarter of 2011, which we believe reflects the positive impact of Federal Reserve easing that was initiated in late 2010.  The full impact has likely not materialized yet, and we expect economic growth will improve further in 2012.  Our outlook assumes economic growth in the United States of at least 3 percent in 2012.
  • We expect total U.S. construction spending, which, net of inflation, has declined since 2004, to finally begin to recover in 2012.  We project a 1.5-percent increase in infrastructure-related construction and a 5-percent increase in nonresidential building construction.  We are expecting housing starts of at least 700 thousand units in 2012, up from 607 thousand units in 2011.
  • While U.S. economic activity is improving, the recovery has been slow by historic standards, and unemployment remains high.  If economic growth does not accelerate, it may take several years for unemployment to reach pre-financial crisis levels.  In our view, this would signal the potential for a prolonged period of continued growth in the United States.
  • The Eurozone public debt crisis has been a lingering negative, but it is unlikely to trigger a worldwide recession.  The Eurozone will likely have at least two quarters of weak, possibly negative growth, but should begin to improve in the second half of 2012.  For 2012, our outlook assumes economic growth for the Eurozone near zero and growth of about half of a percentage point for Europe in total.
  • Our expectation for improvement of European growth in the second half of 2012 rests on a continued easing by the European Central Bank (ECB).  The ECB has recently lowered interest rates and could cut rates further in 2012.  
  • More importantly, the ECB increased its balance sheet more than 35 percent since July 2011 to improve banking system liquidity.  Other European central banks have been taking similar actions.
  • Business investment in both the Eurozone and the United Kingdom has grown faster than the overall economies and is a trend we expect will continue.  Businesses have improved cash flow and need to upgrade capital stocks.  
  • We project the Japanese economy will grow 3.5 percent in 2012, recovering from a 2011 recession.  Rebuilding from the tsunami and more expansionary central bank policies are expected to drive the recovery.
  • We expect economic growth in Asia/Pacific will exceed 6.5 percent in 2012, about the same as in 2011.  Growth should improve in Australia and Indonesia, the result of recent interest rate cuts.
  • China took its first easing action in late 2011, and we expect that further easing is likely.  We expect China‘s economy will grow 8.5 percent in 2012, sufficient for growth in construction and increased commodity demand.
  • Growth in Latin America is expected to slow from 4.3 percent in 2011 to about 4.0 percent in 2012.  Our outlook assumes interest rates will be flat to lower in most countries.  We expect that economic growth will be sufficient for construction spending and mining output to increase.
  • Africa/Middle East will likely benefit from low interest rates and favorable commodity prices.  We expect the regional economy will grow nearly 5.5 percent and that construction spending will continue to improve.
  • We expect the CIS economies will grow more than 5 percent, and construction spending will increase more than 15 percent.  Favorable factors include low interest rates, higher metals and energy prices, and increased production of oil, gas and metals.

Economic Risks

  • In our opinion, the risk of a worldwide recession has diminished significantly over the past quarter, but we remain concerned that central banks, particularly in developed economies, will react to the first signs of better growth by tightening economic policies.  Even modest premature tightening could significantly slow economic growth.