(CAT) Caterpillar’s Sales Growth Dips

Caterpillar Inc. (CAT) recently reported sales statistics for the three months ending October 31, with machine sales increasing 31% on a year-over-year basis and engine sales rising 13% across the globe.

The 31% sales growth in October was steady with the sales clip in the three months period ending September. Sales growth has nonetheless moderated form the highs of 66% recorded in the month of April. Even though Caterpillar has seen sales ramping in the last 18 months, the rate of increase has of late been tempered by tougher year-on-year comparisons and weakening economic conditions, especially in Europe.

Region-wise, the company registered the maximum improvement in North America of 38%, followed by Asia/Pacific and Europe, Africa, and the Middle East (EAME) with a 33% and 32% year-over-year increment, respectively. Rest of the world (ROW) and Latin America were up 28% and 16%, respectively.

EAME, Latin America and ROW witnessed the worst sales performance so far in 2011. Particularly in Latin America, the drop has been drastic, with the sales growth of 16% dropping from 33% in the three months ending September and from the peak of 76% in February.  Latin America has been one of Caterpillar’s best-performing markets this year as construction activity and mining expansion in developing countries such as Brazil boosted demand for equipment.

Sales in the EAME region increased 32% after a 41% climb in September and the highest point of 65% this year in May, affected by the sovereign debt crisis in Europe.

In Reciprocating & Turbine Engine Retail Statistics, sales were up 13% year over year globally. Though the improvement was a tad higher from the 12% recorded in the sequentially preceding month, it was much weaker than the 45% growth displayed in March, the highest rate in 2011 so far.

Among other end markets, sales to the petroleum sector reported the maximum increase of 25% year over year, followed by Industrial, with a 13% year over year climb and Electric Power, up 6% year over year. The Industrial sector, proving to be a disappointment, recorded the least growth in October.

Marine sales dipped 12%, a weak link in Caterpillar’s growth story. Sales growth in this category has been negative since September 2009. The sector had registered a climb in August 2011 of 6%, and since then has resumed its downward trend.

During the recently reported third quarter, Caterpillar’s revenues surged 41% to a record $15.7 billion, surpassing the Zacks Consensus Estimate of $14.7 billion, driven by higher volumes. For 2011, the company expects revenues to be around $56 billion and earnings per share of $7.25. Including the impact of the Bucyrus acquisition, EPS is forecast at $6.75 per share on the back of revenues of about $58 billion in 2011.

For 2012, Caterpillar expects revenues to be up 10% to 20% from the 2011 outlook of about $58 billion. The 2012 estimate includes a full year of Bucyrus-related sales of about $5 billion, up from a partial year of about $2 billion in 2011.

Our Take

We expect Caterpillar’s revenue growth to be aided by demand for construction and mining equipment despite the lingering doubts overhanging the economy at large. Caterpillar’s strong brand name, pricing power and global dealer network put it in a vantage position to capitalize on the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in the emerging markets, will boost its long-term potential.

However, the current slowdown in the growth rate is an inkling cause of concern. We will be more constructive on the stock if the company once again displays the high levels of growth booked earlier this year. The shares of Caterpillar presently retain a Zacks #3 Rank (short-term Hold recommendation). We also reiterate our long-term Neutral rating.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Caterpillar operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

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