Caterpillar Shares Dip: Time for Action?
After shooting up more than 20% in the first few months of the year, Caterpillar's (NYS: CAT) shares have shed nearly 5% in the past five days. Time to panic, or time to seize the opportunity? I vote for the latter, because Cat has shown an exceptional ability to ride over challenges, and I don't see a reason why the stock should get a beating despite treating us to its highest-ever quarterly profits in its recently reported first quarter.
Digging the Earth
When Caterpillar reported first-quarter earnings, its mining business stole the show with a 73% surge in sales. Recently acquired Bucyrus accounted for 50% of the growth. Global demand for mining remains strong, as was evident from mining major Joy Global's (NYS: JOY) first-quarter numbers. Its sales climbed 21% from the year-ago period. Although not its largest division, Cat is betting big on mining. The Bucyrus acquisition, which was its biggest to date, has taken the company up a notch, making it a bigger player than Joy in terms of total mining product range.
Sales in Cat's largest division, construction industries, rose 13%, with most of it coming from North America. It is actually amazing to see the company do well despite overall construction activity levels remaining relatively sluggish in the U.S. Interestingly, the division's revenue from the European region also saw double-digit growth in the fourth quarter, thanks to high replacement demand. Most equipment makers are trying to cash in on this. Terex (NYS: TEX) , for instance, recently hired nearly 500 employees at two U.S. plants to cater to such demand.
Imagine where Cat could go if demand in some of the major construction markets of the world ramped up. China in particular has been under a shroud of slowdown concerns. Being the world's largest construction equipment market, it's a cause for worry. Excavator sales in the nation have slumped in the past few months. But Cat is not worried. Chairman and CEO Douglas Oberhelman felt this slowdown could prove healthy for the industry in the long run, and that it was "the best thing" to have happened because the growth just did not seem to be at sustainable levels. The company also expects the nation to grow more than 8% this year.
Although Cat is expecting softer demand from the Middle Kingdom this year, it sees the nation as an excellent "long-term growth opportunity." Which is why it is upping the ante in a bid to become the leader in the high-potential market. It recently got the go-ahead to buy China-based ERA Mining.
Cat's power systems division fared well, too, with sales rising 12%. Rail is doing well, and the company is working hard to increase presence in the diesel locomotives market. I'm also expecting a lot from the agreement it struck with Westport Innovations last year. The two are evaluating possibilities of incorporating Westport's natural gas engine technology into Cat's large engines. This, together with the recent strengthening of Cat's relationship with Navistar International pertaining to joint truck development, should prove to be great value additions for the company.
The Foolish bottom line
There is a visible uptick in the U.S. construction market, and demand for mining is so high globally that at current capacity, Cat is quoting delivery times extending up to 2014 for some products.
After a smash-hit first quarter, the behemoth looks set to achieve its target of a "record-breaking" 2012. Cat looks poised to stay at the top of its game, and I think any dip would mean an opportunity to bet on this solid company. Stay updated on Caterpillar by clicking here to add it to your watchlist.
If you want to know about a different company that we believe will crush the market in the year ahead, check out our free report "The Motley Fool's Top Stock for 2012." It highlights a company that is revolutionizing commerce in Latin America. You can get instant access to the name of this company by clicking here -- it's absolutely free.
At the time this article was published Neha Chamariadoes not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Joy Global. 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.