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Caterpillar Inc. (CAT) Is Still Not a Buy

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Even after reducing its excess inventory by $2 billion in the fourth quarter of 2012, Caterpillar Inc. (NYSE:CAT) still faces a tougher road ahead. The firm still holds more than $15 billion worth of inventory and faces an uphill struggle to reduce the excess part of this huge inventory, which has been built up due to the economic and political uncertainty in the United States, continued economic turmoil in much of Europe, and slower growth in China. Consequently, this global economic uncertainty has made many companies limit their purchases of equipment that make up a significant proportion of Caterpillar’s total revenue.

Caterpillar Inc. (NYSE:CAT)Quarter Recap

The machinery giant reported fourth-quarter EPS of $1.04 on revenue of $16.08 billion, compared with $2.32 per share in the same quarter a year ago. The average estimate on Caterpillar was to deliver $16.13 billion in revenue with $1.70 in EPS.

The results missed expectations as earnings were reduced by $0.87 per share, due to a goodwill write down for a Chinese firm Siwei that the company bought in 2012. Siwei operates factories that make underground coal-mining equipment in China. If not for that goodwill charge, EPS would have come in at $1.91, which would have beaten the Street’s estimates of $1.70.

Acquisition mess

From the very first look when it was first announced, Siwei seemed like an expensive acquisition, but Caterpillar Inc. (NYSE:CAT) wanted more exposure to the underground coal mining equipment market in China, and acquisitions are considered a logical way to achieve that. Unfortunately, whenever a company is deploying a growth through acquisition strategy, there is always this long-term risk that the company will fail to integrate the acquired companies well. In other words, there always remains the risk that down the road combined operations could become disorganized, leading to a negative impact on the financial performance.

This $700 million acquisition has now been written down to almost zero. Caterpillar blames that Siwei management orchestrated a deliberate, multi-year, coordinated accounting misconduct at the Chinese firm before the acquisition.


CNH Global NV (ADR) (NYSE:CNH) operates in the farm construction machinery industry and is in direct competition with Caterpillar. But unlike Caterpillar, CNH Global sees strong growth as demand for its products remains high. The trend is expected by the analysts to continue this year as well. For 2012, agricultural equipment net sales of $15.7 billion were up 15% and construction equipment net sales of $3.8 billion were up 2%, both on a constant currency basis. Equipment net sales in 2012 were 81% agricultural equipment and 19% construction equipment. CNH Global’s geographic distribution of net sales in 2012 was 44% from North America, 31% EAME & CIS, 15% Latin America, and 10% APAC markets. Continued solid market conditions in the agricultural sector helped CNH Global achieve a full year net income, before restructuring and exceptional items, of $1.2 billion, an increase of 28% from 2011. This performance helped equipment operations to generate almost a billion in cash flow from operations for the full year.

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