Investopedia: Caterpillar Still Down A Cylinder Or Two

The "stuff trade" may be about a year and a half old now, but Caterpillar (NYSE:CAT) is still making money hand over fist as a major supplier of machinery. What's more, while construction may still be flat on its back in the U.S., a lot of the developing world continues to build at a truly dizzying pace. History says this too will fade, but Caterpillar may yet have a few more quarters in the sunshine.

The Quarter That Was 

Sales jumped 62% in the December quarter, as the company saw a 69% increase in sales in its machinery and engine segment. Breaking that down even further, machinery sales were up 88%, while engine revenue increased 36%. Volume growth was a significant part of growth in both business, with higher value added almost $4 billion to the machinery total.

While sales growth was strong, the rest of the income statement was a bit more questionable. The company booked a solid improvement in gross margin, but operating margin was less impressive. True, the company did see its operating margin increase more than 750 basis points from last year's level, but the pace of margin improvement seemed less impressive in light of the volume gains. In other words, the company's incremental operating margins were somewhat disappointing. Moreover, while the company did report an impressive bottom line earnings beat, a big chunk of that came from a lower tax rate. (For more, see Analyzing Operating Margins.) 

The Road Ahead 

With a backlog of nearly $19 billion (double the mid-2009 levels), Caterpillar still has plenty of promising business prospects going into 2011. Mining companies like Vale (Nasdaq: VALE), Potash (NYSE:POT) and Rio Tinto (NYSE:RIO) continue to expand operations and open new mining sites, and that requires machinery. Moreover, do not forget that companies like Gafisa (NYSE:GFA), Vanke, and China Railway continue to build residential and commercial projects at a rapid pace in markets like Brazil and China.

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