Caterpillar Poised for a Solid Quarter

All eyes will be on Caterpillar (NYS: CAT) when it reports first-quarter numbers next week. After a monster fourth quarter, analysts are expecting a 16% year-over-year jump in earnings per share and a 25% jump in revenue.

Let's take a closer look.

Revenue drivers
Following a record year, Cat raised the midpoint of its 2012 revenue expectation by about $3 billion to settle for a range of $68 billion to $72 billion. But perhaps we shouldn't be overly optimistic about Caterpillar's first quarter.

For one, the first quarter is seasonally the weakest for the company. So expecting a huge jump in revenue might be unrealistic. And two, unusually low costs and high price realizations resulted in a particularly good first quarter for Cat last year, which we might not get to see this time around.

But that's not to say Cat's revenue won't go up. Two critical drivers -- the mining boom and the company's global presence -- should continue to work in its favor.

Things to watch out for
I am eager to see how much Bucyrus International, the mining-equipment maker Cat bought last year, contributes to its top line. Together with MWM (a natural-gas-engine maker Cat acquired late last year), Bucyrus is expected to add about $6 billion to revenue this year. That's more than double the 2011 level.

Bucyrus should also start contributing positively to Cat's bottom line this year. The acquisition of Bucyrus is important because it made the behemoth bigger than closest competitor Joy Global (NYS: JOY) in terms of total mining product range.

Cat is now busy integrating Bucyrus' distribution businesses into its own dealership network. It struck two such deals with its dealers this month. More information about these plans is expected in the earnings call.

Emerging markets = big growth
With Bucyrus, Cat is gaining ground in regions where Joy has a good hold, particularly China. The slowdown in the nation didn't deter Cat from announcing a fresh expansion project last month. It expects China to grow at a healthy 8.5% this year. Sales from the nation were higher in the fourth quarter compared to the year-ago period.

Two recent developments have raised hopes further: (1) Cat's winning Chinese approval to buy ERA Mining, and (2) Alcoa (NYS: AA) rocking the Street with solid numbers last week. Why Alcoa? Because, like Cat, the aluminum giant's business depends a lot on China. So Street-crushing numbers do paint a rosier picture for others who bank heavily on the nation.

It's not just China, though. Mining is expected to be huge in emerging markets in general. Demand is so high that, at current capacity, Cat is quoting delivery times extending into 2014 for some products. I am expecting these markets to be significant drivers of Cat's first-quarter top line.

Not free from pains
Cat closed down a Canadian locomotive plant in February because of a labor dispute. It will now have to shift production to other markets. Although I personally do not see any major impact of this on the company's profits, I expect more details about its plans in the upcoming release.

Taxes could be a pain, though. While it stood at 27% last year, the company's tax rate could be as high as 30% this time because of factors like expiry of research and development tax credits in the U.S. and unfavorable rates on a geographic basis. Part of this will perhaps be reflected in the first quarter.

The Foolish bottom line
The industrial powerhouse started the year with 37% higher order backlog (excluding Bucyrus) compared to 2010. The base is strong, and expectations high. Cat has a history of beating expectations, and I think the momentum should continue. Just click here to add Caterpillar to your stock watchlist to read my detailed take on its numbers next week.

In the meantime, to get more earnings-season insight, check out our brand-new free report: "5 Stocks Investors Need to Watch This Earnings Season." It details what to look for from Apple and four other must-watch companies as they report their latest results. Get access right now.

At the time this article was published Fool contributor Neha Chamariadoes not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Joy Global andApple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple.The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story