The recent quarterly report of Caterpillar Inc. (NYSE:CAT) showed a drop in sales on a quarterly basis, although the company showed growth in revenues during 2012 compared to 2011. The drop in revenues and earnings was related to the change in dealers' inventories and the whole debacle related to Siwei acquisition. Will Caterpillar continue to under-perform? Is there a silver lining?
The company's revenues in the fourth quarter declined by 7% and its operating profit fell by nearly 47%, so that the operating profitability reached 6.5% in the last quarter compared to 11.4% in the same quarter in 2011. These very modest figures are related to the change in dealers' inventories that accounted for nearly $600 million drop in revenues during the quarter. The company's Siwei acquisition also proved to be less attractive than it was first estimated as the accounting misconduct in this deal led CAT to add a $580 million for goodwill impairment provision. When controlling for both of these factors the company's profitability rises to 13.3%. But this still shows the company's revenues haven't risen in the last quarter. Moreover, according to the company, the changes in dealers' inventories are likely to keep affecting the company's revenues at the beginning of 2013.
So is there a silver lining? I think the U.S housing and infrastructure sectors might eventually lead to growth in sales in 2013.
Building permits also rose last month. Moreover, the number of new home sold in December remained 8.8% higher than the same month in 2011. The FOMC decision to purchase mortgage backed securities at a monthly pace of $40 billion is likely to keep reviving the housing market. If the housing market in the U.S will continue to show growth, this could lead to a rise in revenues of Caterpillar in this sector.
Based to the recent federal budget outlay (pdf format), during the past three months (October to December) the “Total--Federal Highway Administration” provision reached $17,729 million compared to $11,926 million in the parallel period in 2011. The rise in this provision could suggest an increase in government spending in highway infrastructure – another one of Caterpillar's business segment.
Although these reports show progress in the housing and infrastructure sectors, the construction segment of Caterpillar didn't grow in the fourth quarter: revenues in North America from construction segment declined by 17% compared to the parallel quarter in 2011. This drop in sales, however, was the lowest rate compared to other regions.
In terms of annual dividend yield, which is currently at 2.11%, Caterpillar still has a small lead over other heavy machinery companies such as Cummins Inc. (NYSE:CMI) or Deere & Company (NYSE:DE): the annual yield of Cummins is 1.72% and Deere offers an annual yield of 1.94%. But all these companies aren't able to pay their respective dividend with their free cash flow (CF from operating activities and investing). Caterpillar's free cash flow as of September 2012 reached ($1.09) billion. So the company wasn't able to pay its $937 million dividend from the free CF.