Caterpillar (CAT) reported very strong earnings this morning, beating estimates quite handily. EPS of $1.71 compared to consensus of $1.57 (a 9% beat). As important, the company outlined an environment consistent with global growth persisting and a strong outlook for 2012. Caterpillar’s organic sales grew by 34% this quarter excluding the recent acquisition of Bucyrus. Caterpillar is a cyclical company, and overly sensitive to changes in the global economy. For perspective, in 2009, Caterpillar saw sales decline by 37%. Each of CAT’s business segments has what are called “trough plans” which are fire drills that prepare CAT in advance for sudden slowdowns in the global economy. This is a company and management team used to handling volatility in the global economy so they are well worth listening to during earnings season.
Caterpillar revised the rest of the year outlook higher (only one quarter to go) and provided preliminary expectations of 10-20% additional growth in 2012. If this growth comes about the company will earn over $9 in EPS and the shares are still only about 10x earnings in the pre-market. Caterpillar highlights low, yet positive growth in developed markets such as the US and Europe and looks for continued strong growth in developing markets around the world. The company did mention that end-market sales in China continue to run negative for machinery (this was the case last quarter) though CAT’s sales to dealers were positive. Since CAT has an optimistic outlook an important take-away on the conference call will be why they are quite confident despite some growth in Chinese dealer inventories.
Caterpillar’s results mirror the strength from Parker Hannifin (PH), released last week. Parker Hannifin is one of the world’s leading diversified industrial companies. Parker Hannifin has large businesses in motion control, aerospace, fluid power systems, electromechanical controls, air conditioning, industrial refrigeration and thermal products. Parker reported record third quarter earnings which grew about 20% vs. a year ago. Organic sales growth was +10% which contained 3% from FX and 1% from acquisitions. Parker Hannifin not only had strong sales but grew operating margins to new records of 16.1% with particular strength in the American industrial segment and aerospace.
Parker Hannifin’s CEO, Don Washkewicz, summed things up very nicely on the earnings conference call when discussing the global economy from an industrial company’s point of view:
“Well, Europe is still doing fine. Asia, as you know, is trending down, and we anticipated that last quarter. But, again, when we talk about Asia going down and China in particular, we’re talking about from a 12% GDP down to maybe a 9% or 10% GDP. And we’ll see how long that sustains. Typically, what we’ve seen over there, it’s been a short-lived thing, and typically, activity picks up again. But even at 9% or 10%, we’re happy with those kind of numbers and we can deal with that. Incrementals over in Asia are a little bit lower than what we’d like to see, but keep in mind that we’re putting a lot of infrastructure in Asia to support future growth there. So I mean, both in India and China and elsewhere, we’ve got a lot of investment going on in Asia to participate in the high growth rates that we’re seeing from that region. Europe, kind of the same thing. What we see — it’s not the same thing, I shouldn’t say, as far as trends — Europe, if we look at the pressure curves in Europe, we would see strong 312s, which is indicative of what we’re going to see coming up here in the future month as far as the trend that’s the 1212. And the 1212 pressure curves, this would be last 12 months over the previous year, is hanging in there very strong. They’re both declining slightly, which can be expected for this part in the business cycle. But I would say right now, Europe looks very good for us. All of the major countries there, being Germany, France, the UK, Italy, are all looking good. So we’re not as concerned about the smaller countries. Of course, we want to see strength across the board, but the major ones are all doing very well and remain strong for us. So that’s the reason we’re pretty optimistic about Europe going forward. In spite of the fact that, of course, everybody has been reading the newspapers, and I’d just make one other comment — if we haven’t talked ourself into a double dip by now, we probably won’t, because we’ve been talking about it for the better part of two quarters here. Europe with the Greece problem and the debt problem hanging over us, and the $14 trillion debt in the United States, if we haven’t talked ourselves into it yet, I don’t think it’s probably going to happen anytime soon. So having said that, that’s the reason why we’re bullish going forward through the balance of our fiscal year. Hopefully, that helps you, Ann.”