Caterpillar Forecast Tops Estimates as Construction Recovers

Jan 27, 2014 4:10 pm ET

(Updates with closing share price in fourth paragraph.)

Jan. 27 (Bloomberg) -- Caterpillar Inc., the largest maker of mining and construction equipment, forecast earnings and revenue for 2014 that topped analysts’ estimates as the recovery in the U.S. building industry spurs sales of bulldozers and excavators.

Sales will be about $56 billion plus or minus 5 percent, the company said in a statement today. The average of 13 estimates compiled by Bloomberg was $55.5 billion.

Profit will be $5.85 a share excluding $400 million to $500 million in restructuring costs. That’s more than the $5.77 average estimate. Peoria, Illinois-based Caterpillar also said it approved a $10 billion share buyback plan through 2018 and will repurchase about $1.7 billion in stock in the first quarter that will complete its previous authorization.

Caterpillar rose 5.9 percent to $91.29 in New York, the biggest gain since November 2011.

“The buyback, restructuring and slightly better-than- expected results combined will make it a better report than expectations, especially after selling off on macro fears into the report,” Larry De Maria, a New York-based analyst for William Blair & Co. who recommends buying the stock, said in an interview today.

The shares dropped 2.6 percent on Jan. 24 amid a general decline in equities. A selloff in developing-nation currencies last week led to concern that financial markets will become more volatile.

Mining Slump

Caterpillar today forecast world economic growth at about 3 percent in 2014, up from about 2 percent last year. It predicted sales in its power systems and construction industries units will rise 5 percent. The resources segment, which consists mainly of mining equipment, will see revenue fall about 10 percent, it said.

Speaking today in an interview on Bloomberg Television, Chairman and Chief Executive Officer Doug Oberhelman said that while the depth of the mining slump is “surprising,” the worst of the cost cuts for the company is “behind us.”

Fourth-quarter net income was $1.54 a share, compared with $1.04 a year earlier. The average of 20 analysts’ estimates was for earnings of $1.27. Sales dropped to $14.4 billion from $16.1 billion, beating the $13.6 billion average projection.

Today’s report is being interpreted as a bottom for Caterpillar as the improvement in construction and power systems offsets the decline in mining, Stephen Volkmann, a New York- based analyst for Jefferies & Co. who recommends holding the shares, said in an interview.

Inventory Cuts

Construction industries sales rose 20 percent in the fourth quarter because dealers didn’t cut as much inventory as a year earlier and deliveries to customers in Latin America, North America and China rose, Caterpillar said.

U.S. construction spending in November was the highest since March 2009, according to the latest Census Bureau data. Both residential and non-residential construction in the U.S. will improve, according to Seth Weber, an analyst for RBC Capital Markets LLC in New York.

Construction machinery made up 33 percent of Caterpillar’s 2013 sales, according to data compiled by Bloomberg. North America and China, which account for half of global construction-equipment demand, should lead market growth in 2014, Karen Ubelhart, a Bloomberg Industries analyst said in a report on Dec. 3.

Bucyrus Deal

In contrast, capital expenditure by the mining industry fell more than 25 percent in 2013 and is expected to drop at least 20 percent this year, Ann Duignan, a New York-based analyst for JPMorgan Chase & Co., said in a Jan. 16 report.

From 2006 to 2012, mining companies spent $676 billion, up from $174 billion in the previous seven years, Duignan said. Toward the end of that boom, Oberhelman acquired two companies to expand Caterpillar’s range of mining equipment.

In its largest deal, Caterpillar paid $8.6 billion for Bucyrus International Inc. in 2011. The following year it acquired ERA Mining Machinery Ltd. in China for $790 million. The company later took a $580 million goodwill impairment charge after discovering accounting misconduct at part of ERA.

Meanwhile the slowdown in mining orders has led to job cuts and plant closures. Caterpillar said in October the company fired more than 13,000 workers in the preceding 12 months.

Oberhelman said in today’s interview he doesn’t regret buying Bucyrus. Given the cyclical nature of the mining industry, Caterpillar said it doesn’t make sense at the bottom of the cycle to make “large-scale physical changes” to its plants because current production is far below the expected replacement level and mine production is continuing to increase.

They company will look at “relatively small” acquisition possibilities, particularly in power systems, Oberhelman said during a conference call with analysts today.

--Editors: Simon Casey, Stephen Cunningham