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January 25, 2012 9:14 AM EST
Caterpillar, the world's largest maker of construction and mining equipment, is expected to beat Wall Street's consensus profit estimates in the fourth quarter of 2011 on resurgent U.S. home building, customers' need to replace aging equipment and mining company demands.
Caterpillar Inc. (NYSE: CAT) is likely to book a profit of $16.05 billion, or $1.69 a share, in the fourth quarter, based on the average estimate of analysts surveyed by Thomson Reuters. In the same period a year earlier, profit was $1.47 a share on $12.81 billion in revenue, which topped estimates after missing them in the quarter prior by five cents.
Larry DeMaria, a New York-based analyst for William Blair & Co. who has an "Outperform" rating on Peoria, Ill.-based Caterpillar said it's "entirely possible" for the company to beat the Street's consensus. "Their fourth quarter should be pretty good. Several trends have been quite favorable."
Caterpillar's earnings guidance for the fourth quarter is $1.73 a share.
Housing Recovery
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The pickup in U.S. housing market is one of these favorable trends.
Housing activities began recovering in the fourth quarter, which is a boon for Caterpillar, as demand for heavy machinery will rise.
After trailing for the first 10 months of last year, the number of housing starts in 2011 surpassed the previous year's total, mostly on the strength of multi-family starts. At the end of December, 606,900 housing starts were reported for 2011 compared with 586,900 in 2010.
"The U.S. is actually doing a little bit better than most people expected," Fleck said. He thinks investors will be hearing some sizable domestic strength reports from Caterpillar when it releases its fourth quarter earnings on Thursday Jan. 26, before markets opens.
Caterpillar North America construction equipment was approximately 20 percent of sales in 2006 before falling to 10 percent. However, that percentage is now growing, DeMaria's estimates. He thinks the U.S. housing market has finally hit the bottom and may "start to see some real growth in the back half of 2012 and beyond."
Foreign Demand, Replacement Needs
Caterpillar operates a cyclical business, which means the business is highly correlated to economic fluctuations. However, by securing a diversified presence in different markets, the company was able to "decouple" itself, to some extent, from the business cycle, making its returns more predictable.
"Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point," Douglas Oberhelman, chairman and CEO of Caterpillar, told analysts on an October conference call.
Last year, more than a third of Caterpillar's business came from outside the U.S., and that is expected to increase.
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