Caterpillar Inc. hosted an analyst meeting at Mine Expo this afternoon. It reframed its longer term guidance for lower global economic growth but otherwise maintained its incremental margin targets. It also provided some downside scenarios and suggested that 2012 sales could be $2 bln less than previously expected due to dealer inventory reductions.


Shares dropped 2.24% in after-hours trading on the news.
Bottom Line

Inventory reduction suggests a downside to 2012 EPS, while the recession scenarios could also appear more conservative
than some may have hoped for. All in all, Caterpillar Inc. highlighted progress it has made in implementing Caterpillar Inc. Production System and improving profitability while meeting global demand.
Delivering on long term strategy

Caterpillar Inc. (NYSE:CAT) underscored the significant improvements to the business it has made through implementation of the Caterpillar Inc. (NYSE:CAT) production system, as it has maintained cost growth at less than half of sales growth and is hitting its ~25% incremental margin target. Management sounded very confident it can maintain or accelerate this as it integrates Bucyrus and other acquisitions, continues CPS implementation, and eases off of R&D and capacity expansions. It remains focused on increasing inventory turns.
2015 targets more reasonable

Caterpillar Inc. (NYSE:CAT) reduced its 2015 sales and earnings targets given the lower world growth scenario compared to the last analyst day at ConExpo in 2011. It now believes it can achieve $12-18 in EPS on $80-100 bln in sales in 2015 compared to $15-20 EPS, previously. The key difference is slower global economic growth driving a slower recovery in end market sales, as CAT is more convinced it will be more profitable going forward. Caterpillar Inc. also indicated that if global growth turns out to be closer to previous forecasts, it would raise its 2015 target back to $15-20.

2013 recession scenario presents framework for investors

Caterpillar Inc. also provided a 2013 recession scenario for what earnings might look like in a recession. This scenario assumes a 15% sales decline for EPS of at least $6.00, which analysts estimate implies ~30-35% decremental margins. A more severe recession scenario (30-40% sales decline) could see EPS closer to $3.50, but Caterpillar Inc. believes it could also maintain the dividend and its credit rating. While the 30-35% decremental seems reasonable to most analysts, the $3.50 “severe” scenario could be more conservative than expected. Currently Caterpillar shares are trading at 15.1x P/E on the $6.00 downside scenario.
Uses of cash

Caterpillar Inc. noted that debt reduction, maintaining its credit rating and continued dividend growth will be its focus for the next several years. Management noted that it may seek to restart its share repurchase program in 2015 after the balance sheet is improved. Guidance unchanged for now, but $2 bln inventory reduction. Caterpillar Inc. (NYSE:CAT) said it would address any changes to 2012 guidance for the earnings call in late October, but that it expects sales will be hurt by $2bln as it focuses on reducing inventory. At a 25% decremental margin, we estimate that this suggests a potential impact to EPS of ~$0.50. Looking furtherahead, Caterpillar Inc. suggested that 2013 will likely “resemble” 2012, but it was unclear whether this referred to growth or EPS. It did suggest that inventory reduction by dealers would continue in 1Q.

Disclosure: No positions