Parts Helping Make Caterpillar Whole as Recovery Gains Steam

Parts Helping Make Caterpillar Whole as Recovery Gains Steam

While sales gains in the second-quarter were driven by construction in China, demand for aftermarket parts is accelerating in mining and energy.

Small parts are giving a big boost to Caterpillar Inc.’s efforts to shake a four-year slump in sales of its giant yellow machines.

Shares surged to a five-year high on July 25 after the heavy-equipment maker boosted its 2017 sales and earnings outlook. The Peoria, Ill.-based company’s projected 2017 revenue tops analysts’ estimates and would mark the first increase in annual sales since 2012. Second-quarter revenue and earnings exceeded estimates.

While sales gains in the second-quarter were driven by construction in China, demand for aftermarket parts is accelerating in mining and energy, the company said. That signals orders in those industries could be on the cusp of a rebound as older equipment wears out. Caterpillar, which said in May it was feeling better about the global economy, said on July 25 that “mining and oil-related activities have come off of recent lows.”

“The aftermarket parts increases mean they’ll have more equipment demand to follow, so that piece hasn’t even kicked in yet,” said Karen Ubelhart, a New York-based analyst at Bloomberg Intelligence. “Caterpillar is saying that the recovery is happening, that they have a lot of confidence. Dealers are clearly feeling better, and that’s telling you that customers are starting to buy.”

Caterpillar rose as much as 5.1% to $113.69 in New York, the highest since March 2012. The stock climbed about 16% in the second quarter, the second-best performance in the Dow Jones Industrial Average.

The company on July 25 reported second-quarter earnings of $1.49 a share, beating the $1.25 average of 15 analysts’ estimates compiled by Bloomberg. Sales in the quarter were $11.33 billion, topping the $10.89 billion estimate.

Caterpillar projected 2017 revenue in the range of $42 billion to $44 billion, higher than the $38 billion to $41 billion it projected in April.

“While a number of our end markets remain challenged, construction in China and gas compression in North America were highlights in the quarter,” Caterpillar CEO Jim Umpleby said. “Mining and oil-related activities have come off of recent lows, and we are seeing improving demand for construction in most regions.”

On Monday, Caterpillar reported that machine sales rose 7% in the three months through June, buoyed by strong demand in Asia Pacific. Sales climbed as China’s economy expanded in the first quarter at a faster-than-expected pace amid an acceleration in industrial output. The Asian nation’s fixed-asset investment climbed 8.6% in the first half of the year, government data showed.

“It largely has to do with their positioning in Asia and the strength in that market,” Gordon Johnson, managing director at Axiom Capital Management in New York, said in a telephone interview.

In June, the equipment maker raised its quarterly dividend by one cent to 78 cents a share, citing an improving cost structure, strong balance sheet and solid cash flow.

The company said last month it’s starting to see an end to dealer-inventory reductions as mining fleets age and miners forecast increased capital spending. Equipment is being utilized at “fairly high” rates, and stock levels of after-market parts are being replenished, resources industries head Denise Johnson said in June.

By Luzi Ann Javier and Joe Deaux

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