Tough task ahead for new Caterpillar Inc. CEO

The earnings per share targets inherited by Caterpillar Inc.'s new CEO Doug Oberhelman are unlikely to met, according to analysts of the financial markets. The 2012 target, which Oberhelman was bequeathed by his predecessor Jim Owens, is for earnings to be between $8 and $10 per share. Analysts who have been studying Caterpillar's figures have predicted an average earning of $6.08 per share, which is 32 percent less than the target.

The demand within the construction equipment market is once again growing, after the recession, and Caterpillar, as the largest manufacturer of such equipment in the world, as demonstrated by the ubiquity of the Caterpillar excavator, has announced a $1.5 billion investment in order to raise the level of output and meet the demands. Investors in the company are worried that there may be a repeat of the previous period of sales growth, when Caterpillar, famous for its diggers for sale, managed to fail to show a significant profit.

Of all the industrial companies in the USA, Caterpillar Inc. is the second largest debtor, after General Electric Co., and as such is watched carefully by Joel Levington, one of the Managing Directors of Corporate Credit at New York's Brookfield Investment Management Co. Levington says, Show me that you can improve your inventory management, manage your raw-material inflation and show me you can expand operating margins. You need more than just revenue growth.

The second quarter results are due to be announced by Caterpillar, and as yet, Caterpillar have refused to comment on speculation regarding their earnings per share.

Andrew Casey, an analyst for Boston's Wells Fargo, observed, If the company produces higher-than-anticipated earnings in the short term as we expect, investors may begin to place a higher probability on Caterpillar’s ability to achieve its longer-term revenue and earnings targets.

Whilst sales have have grown steadily, with data compiled by Jefferies and Co. showing that a 24 percent increase between 2006 and 2008, Caterpillar's profit margins plateaued, as they paid more to suppliers in order to speed up their acquisition of parts, and the price of raw materials rose. Demand for Caterpillar products rose throughout 2007/2008, but as they increased production to meet those demands, so did their expenditure. Mark Demos, a portfolio manager for Fifth Third Asset Management Inc., which, as part of the $17.8 billion under their management, holds an interest in Caterpillar to the tune of 125,379 shares, said, They tried to produce too much in too little time.

In terms of their competitors, Komatsu Ltd., the Japanese firm, increased both earnings and revenue between 2006-2008, by 83 percent and 39 percent respectively. Deere and Co., makers of John Deere tractors, also saw a 2006-2008 increase in profit, by 21 percent, and sales, by 30 percent. However, Caterpillar have climbed this year on the Dow Jones, after gaining 17 percent; Deere and Co. also climbed, by 12 percent, whilst Komatsu dropped by 11 percent. Caterpillar's nascent resurgence can be attributed to measures taken in the last two years, particularly improving production capacity, and streamlining both its supplier base, and its methods of purchasing raw materials. Robert Wertheimer, an analyst with Morgan Stanley, commented, A lot of ground work has been laid. What the company needs to do is execute.

However therre are risks inherent within the recovery. Almoost two thirds of Caterpillar's revenue in the first quarter of the year came form outside the US and Canada. The International Monetary Fund has forecast that global growth will be in excess of earlier projections, but also issued warnings that the economic problems of Europe could still affect the capital which is being pumped into the emerging markets, particularly of Asia. Jeff Windau, an analyst for Edward Jones and Co., said, We need to a have a really strong economic recovery” for Caterpillar to hit its 2012 earnings target. It’s an aggressive goal.

However, Ann Duignan, an analyst at JPMorgan Chase and Co. in New York, thinks otherwise, commenting that earnings of $8 per share, may not be as big a stretch as some believe, before predicting earnings of $8.69 per share. We believe the market is overlooking what could turn out to be the beginning of the next multi-year construction cycle in the U.S, she commented.

Doug Oberhelman earned a degree in finance from the Millikin University in Illinois in 1975, and began working for Caterpillar in the same year. From 1998 until 2001 he was the vice president of the engine unit, and under his stewardship, the engine unit increased its profitability. He now has a big job on his hands, after taking over form Jim Owens as CEO. Eli Lustgarten, an analyst for Longbow Research, offers this comparison, Owens tends to be more cerebral. Oberhelman will be more focused on operations and improving profit.