Caterpillar Looks Strong Despite Euro Woes [Analysis]

Amidst the global turmoil in the construction industry, Caterpillar Inc (NYSE:CAT) announced a 67% increase in its second-quarter profits for 2012 on Wednesday. Caterpillar Inc (NYSE:CAT) even improved its forward-looking estimates for annual profit per share for 2012, to $9.60 from $9.50. Following this announcement, Caterpillar Inc (NYSE:CAT) went up 2.86% and closed on Thursday at $83.30.

However, a bleak outlook was maintained for the next two quarters, with revenue forecasts revised downwards from the range of $68 to $72 billion, to $68 to $70 billion. The dues built up to 3.35% from 3.19% in Q1 and 2.89% at the end of 2011, reflecting higher delinquencies in European and Chinese portfolios.

The upward revisions in profit outlooks were based on expected increase in machinery demand in North America where the demand is rising as the US replaces aging equipment. The company CEO, Oberhelman, felt that the US construction was well below its peak and could be expected to rise in the next two quarters.

Europe’s issues hit the company sharply in Q2 with Europe’s high sovereign debt, out-of-control government spending, and insolvent regional banks taking its toll on the construction sector. European Central Bank (ECB) reported a decline in the value added in construction for the last four consecutive quarters (2011 Q2: -1.1%, 2011 Q3: -0.9%, 2011 Q4: -0.1% and 2012 Q1: -0.9%).

Value-added in construction at Current Prices in the Euro Area

Caterpillar Looks Strong Despite Euro Woes [Analysis]

There is a general feeling that Europe’s recession is deep-rooted, and even Oberhelman is of the opinion that it will take the Eurozone some time to bounce back. Furthermore, many economists feel that even when recovery does happen for Europe, construction might be the last sector to rebound, because of its risky investment characteristics.

Caterpillar also suffered a setback in China. It was expected that within the next decade, China’s construction industry will account for nearly one-fifth of all global construction output. However, following the credit bubble and galloping construction and property sectors, China had to slow down its growth and curb its demand.

Housing construction in China outpaced the demand for it, leaving many apartment buildings unoccupied and spurring a decline in property prices. Local Chinese machinery makers such as Sany, Zoomlion and Shantui also saw a drop in sales in 2012 as a result of lower economic growth targets and restrictions on property purchase.

CAT reported a decline in sales in China of $250-300 million in first quarter of this year, leading to a buildup of inventories in the country. Hence, CAT decided earlier this year to direct the excess inventory to other regions. CAT is to export around 20% of the midsize excavators produced in China this year.

However, many analysts feel that the slowdown in China is a temporary issue as the demand has been artificially curbed. Caterpillar forecasted a growth of 8% in China this year. Oberhelman felt that monetary easing and investment initiatives in China can be expected and may help economic growth in the second half of 2012 and in 2013.

‘I am cautiously optimistic about the world economy in 2013, very positive on the long-term prospects for global growth and excited about the role Caterpillar will play in making that growth happen.  After all, the road to progress … begins with a road,’ Oberhelman said.