Restructuring efforts over the past few years are starting to come to fruition for the wide-moat manufacturer.
By Keith Schoonmaker, CFA | 04-26-17 | 01:10 AM | Email Article

We raised our fair value estimate to $78 from $64 per share as we increased our revenue projections for the next two years and decreased our projected U.S. federal statutory tax rate beginning in 2018.  Caterpillar  exceeded our expectations this quarter on both the top and bottom lines as restructuring efforts over the past few years are starting to come to fruition. Total revenue increased to $9.8 billion from $9.5 billion in the prior-year period, and EPS excluding restructuring costs jumped to $1.28 from $0.64. The global manufacturing environment has been dreadful over the past few years as commodity prices slumped and customers reduced spending, but Caterpillar’s first quarter marks the first quarter in the past 10 that revenue in both the Machinery, Energy, and Transportation and Financial Products segments increased year over year. In addition, management raised guidance, and now expects revenue to range from $38 billion to $41 billion (previously $36 billion to $39 billion), and EPS excluding restructuring to be $3.75 (was $2.90).

Keith Schoonmaker, CFA, is director of industrials equity research for Morningstar.

Machinery, Energy & Transportation increased 4.0% due to both sales volume and pricing gains. Resource Industries increased 15.3% thanks to a pickup in demand for new equipment and aftermarket parts. Management indicated mining equipment operated at higher utilization rates compared with the previous year, and expects a pickup in mining truck orders as conditions surrounding commodities are starting to appear more favorable.

We forecast single-digit growth over the next five years, and believe a pickup in orders will drive down inventory and drive up profitability. This would be a drastic improvement from the past four years, but we are still cautious on global heavy machinery. Factors that may stall Caterpillar’s turnaround include delays in infrastructure and tax reform plans in the U.S., oversupply of crude oil weighing on pricing, and worldwide political uncertainty causing a disruption to development.

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Keith Schoonmaker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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