Caterpillar Unearths Another Upbeat Earnings Report

We plan to increase our fair value estimate for  Caterpillar (CAT) to $102 per share from $100 to account for the time value of money after the company's third-quarter earnings release. Total sales were flat year over year, as Caterpillar's mining-related sales are finally declining at a slower pace but are being fully offset by energy and transportation product demand. Adjusted operating income was similarly flat, as ongoing restructuring efforts and Lean implementation continue to rein in costs. We remain comfortable with Caterpillar's long-term positioning and wide moat rating.

Quarterly sales were largely supported by the energy and transportation segment (43% of industrial revenue), which increased sales 13% year over year and saw 29% improvement in segment operating profit. Construction sales (35% of industrial sales) were up 2% relative to the prior year, but operating income rose 67% on better pricing and currency translation. Resources segment sales (22% of industrial sales) are declining at a slower pace (down 19% in the current quarter relative to a 29% decline in the second quarter). Operating profit for the segment declined 62%. Financial product operating income was flat with the prior year.

Year to date, Caterpillar's nonfinancial products' cash flow from operations was weak (down 30% year over year) on higher inventory levels. Despite weak cash flow generation, the company purchased another $1.7 billion of stock in the quarter.

The company narrowed its revenue outlook to $55 billion from $54 billion-$56 billion, given greater visibility with only one quarter to go. It raised its adjusted earnings per share outlook to $6.50 from $6.20, reflecting a combination of better cost control and the timing of share repurchases. Looking to 2015, Caterpillar expects $55 billion of revenue but offered little commentary on EPS.

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