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Market Update

Caterpillar Tops Our Expectations

We are likely to increase our fair value estimate for the firm, but we may also raise its uncertainty rating.


 Caterpillar (CAT) reported strong first-quarter results Friday that highlighted continued end market improvements coupled with dealer inventory restocking. Machinery and engine segment revenue climbed 63% from a year ago, driven by a 90% jump in Latin America and a 72% increase in North American sales. About $800 million (or 17%) of the $4.7 billion revenue increase was due to dealer inventory restocking from very low levels a year ago. Although this effect led to a negative mix shift (dealers typically stock smaller equipment, which usually carry lower margins for Cat), the company's profitability topped our expectations, with high 20s incremental margins that were ahead of even management's full-year 25% forecast.

Our long-run margin assumptions remain intact, given the firm's inherent cyclicality, and we think much of the firm's good news has already been priced into the stock. However, we plan to revisit our near-term projections. Management's updated top-line guidance of $52 billion-$54 billion (including financial services revenue but excluding the not-yet-closed MWM and Bucyrus (BUCY) acquisitions) is only slightly ahead of our current assumptions, but we have probably underestimated Cat's ability to contain costs during the expected rebound. The company now expects earnings per share (again, excluding planned 2011 acquisitions) of $6.25-$6.75 versus a prior forecast of "near $6." As such, we are likely to increase our fair value estimate.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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