Caterpillar’s Successful Quarter Signals Industrial Growth Across Multiple Markets
When analysts and other market-watchers want a quick look at the global economic picture, one of the first places they turn to is Caterpillar Incorporated (NYSE:CAT) (Peoria, Illinois). The heavy-machinery manufacturer has a hand in industries ranging from mining to oil and gas exploration to residential construction, and any movement in those markets--be it a ripple or a shockwave--will show up on Caterpillar's balance sheets. That's why the company's most recent quarterly earnings report spurred optimism on Wall Street, in Washington and as far away as Beijing.
Caterpillar's third-quarter overall sales stood at $11.4 billion, a 23.9% increase from third-quarter 2016. Profits were reported to be $1.06 billion, compared with $283 million in the same period last year. Sales jumped 27% in North America alone, driven in part by equipment orders in the U.S. oil and gas industry and stabilization in the mining industry, which is coming off a long period of decline.
A weakening dollar proved advantageous in global markets, making U.S.-based manufacturing products more affordable to foreign buyers. When combined with regional trends, this led to exceptionally strong growth in key geographies: China’s growing construction market fueled a 31% sales growth in the Asia-Pacific region; replenished inventories from dealers in the Europe, Africa and the Middle East region pushed sales up 22%; and generally improved economic conditions in Latin America boosted sales there 24%.
Caterpillar's fortunes rise or fall with global economic growth or stagnation. Just last summer, analysts pointed to the company's fourth straight year of lower overall sales--partly driven by weak coal and mining-related business--as an indication of how low commodity prices were taking a toll on project spending worldwide. For more information, see August 22, 2016, article - Caterpillar Closes, Consolidates Coal and Mining-Related Facilities as Prices Pummel Bottom Line.
But commodity prices have been strengthening in the past year, giving developers in the Oil & Gas and Metals & Minerals industries reason to pursue new projects and revive stalled ones. Coupled with a recovering housing market and a steady decline in unemployment, the trend points to a rapid growth in demand for Caterpillar's construction equipment in North America. Similar trends can be found in major markets abroad, particularly China.
"Overall, we're seeing broad-based sales increases across a number of industries in all regions," said Donald James Umpleby, the chief executive officer of Caterpillar, in an earnings-related conference call this week. "We continue to see strength in China construction. Onshore oil and gas in North America is also strong. Construction activity in North America was up compared to last year, and we're seeing increased order activity by mining customers."
Caterpillar expects these trends to continue. For the full year, it expects revenue in its construction business to increase about 20% and in its mining business to increase 30%; overall revenue was revised upward from last quarter’s estimate by $2 billion to about $44 billion.
“After years of cost-cutting and productivity enhancements, mining firms are starting to invest in equipment in order to maintain and grow market share in this improving atmosphere for commodity demand," said Joseph Govreau, Industrial Info’s vice president of research for the Metals & Minerals Industry. "We are hearing from several equipment and service providers that things are heating up in the mining sector globally. This recent news from Caterpillar, one of the largest mining and construction original equipment manufacturers (OEM), supports this trend."
North America’s Power Generation and Oil & Gas industries also are among those expected to see strong growth in the near term. Electric power developers are expected to begin construction on about 27,722 megawatts (MW) of new generating capacity in the U.S. and Canada this year, and take it up to about 50,000 and 48,000 MW in 2018 and 2019, respectively. Meanwhile, investment in unconventional upstream oil and gas development is up 50% this year, boosting demand for domestic infrastructure projects like gas-processing facilities and gas pipelines. For more information, see October 23, 2017, article - North American Power Development: The Pause Before the Surge, and October 24, 2017, article - Strong North American Project Spending for Gas Infrastructure Expected to Continue.
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