Caterpillar's earnings surprise is good news for all mining equipment shares

10/24/2011 4:03 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

This morning, October 24, before the New York market opened Caterpillar (CAT) announced third quarter earnings of $1.71 a share, a positive earnings surprise of 7 cents a share.

Today, as you’d expect Caterpillar shares are up big—5.08% as of 2:20 p.m. New York time—and as you’d expect Caterpillar’s positive surprise has sent shares of other companies in the construction and mining equipment sector soaring.

And the more exposure a company has to mining—the strongest part of Caterpillar’s business this quarter—the bigger the gain. So Deere (DE), which has more exposure to farm than to construction equipment, is up 3.26%. Joy Global (JOYG), which is more of a pure play on mining than Caterpillar, is up 5.68%. And Titan International, which has big exposure to mining and has been beaten down more than either Caterpillar or Joy Global, is up 11.64%. (Deere and Joy Global are both members of my Jubak Picks 50 long-term portfolio http://jubakpicks.com// . Titan International is a member of my 12-18 month Jubak’s Picks portfolio http://jubakpicks.com/ )

It also probably hasn’t hurt Titan International that the company reports earnings on October 26, after the New York market closes, and that’s close enough to Caterpillar’s report date to make the momentum players jump on board in search of another earnings surprise. (Joy Global, by contrast, doesn’t report earnings again until December 14.)

Let’s not move on too quickly from Caterpillar’s earnings, though. Excluding the effects of the company’s acquisition of mining equipment maker Bucyrus International in July, revenue was up 31% year to year and earnings climbed by 58%. Including the effects of that deal adds to revenue—revenue grew by 41%--but cuts into earnings growth—earnings grew by 40%--because Bucyrus sales, in general, carry a lower profit margin than do Caterpillar’s sales.

But the acquisition of Bucyrus was clearly a transformative event for Caterpillar’s resource industries unit. Third-quarter sales for the unit doubled to $4.6 billion with about half of that increase coming from Bucyrus.

Caterpillar raised its guidance for the full 2011 year to $6.75 in earnings per share from its prior $6.25 to $6.75 estimate. For 2012 the company’s guidance for $63.8 to $69.6 billion in revenue pretty much bracketed Wall Street’s projection of $65.74 billion.

The one glitch in the company’s performance turns out to be not a glitch at all when you dig a little bit. Operating profit margin was essentially flat year to year and sequentially from the second quarter. But that was a result of the dilution and costs of the Bucyrus and other acquisitions in the period. Excluding those effects, Caterpillar’s incremental margins climbed to 22% from a very weak 18% in the second quarter.

Maybe the most important aspect of the company’s report, though—certainly for Caterpillar’s fellow sector members—was its confidence about the global economy in 2012. The company said it saw the global economy recovering in 2012 with the U.S. economy expanding by 2.5%, China by 9%, and the overall global economy growing by 3.5%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Deere, Joy Global, and Titan International as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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