North America

Earnings Preview: Caterpillar Q1 2017 (CAT)

By: Craig Bowles

Overview

Caterpillar Company (CAT) is slated to report 1Q 2017 earnings before the opening bell on Tuesday, April 25th. The earnings release is expected at approximately 7:30 a.m. ET with an 11:00 a.m. conference call webcast available through Caterpillar Investor Relations. The world’s largest manufacturer of mining and construction equipment is a component of the Dow Industrial Average and S&P 500 Index.  Late in the business cycle, the size and cyclical nature of the company increases in importance to the overall market and as an economic indicator.

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Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) or Earnings Per Share (EPS) Excluding Items: The Street estimate is $0.62 (range $0.52 to $0.91) (Source: Yahoo! Finance). Consensus was $0.61 three months ago. Before 2014, Caterpillar had typically reported a “clean” EPS figure.
  • Revenues: Analysts expect a decrease of 2.1% y/y to $9.26 bln (range $9.05 bln to $9.59 bln).
  • Adjusted Earnings Per Share Guidance (FY2017): Guidance is currently $2.90. Analyst consensus is currently $3.25 (range $2.85 to $3.96).
  • Earnings Per Share Guidance (FY2017): Guidance is currently $2.30.
  • Revenues Guidance (FY2017): Guidance is currently $36.0 bln to $39.0 bln. Consensus is $38.25 bln.
  • Caterpillar’s Price/Book 4.2 compares to a five-year average of 3.2; Price/Sales 1.4 compares to a five-year average of 1.0; Price/Cash Flow 9.7 compares to a five-year average of 6.9; Dividend Yield 3.3% compares to a five-year average of 2.9%.
  • Analysts view CAT with 9 (8 last qtr) Buy, 10 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders sold a net 87,316 shares during the last three months and a net 170,629 shares over the past year. (source: NASDAQ.com) Caterpillar’s 2007 $7.5 billion stock buyback program ran through 2015. In January 2014, the company approved another $10 billion through 2018 but hasn’t repurchased shares since 2015.
  • Greenlight Capital’s David Einhorn pointed out that Caterpillar’s fortunes tend to rise and fall with the iron and coal markets which had struggled since 2011 but show an early 2016 low. (source: Iron prices) (source: Coal prices)
  • Caterpillar is compared to other construction and mining equipment companies with quarterly results possibly impacting John Deere (DE), Ingersoll-Rand (IR), CNH Industrial (CNHI), Joy Global (JOY), Cummins Inc. (CMI), & Terex Corp. (TEX).
  • Caterpillar shares have a 1-day average price change on earnings over the past eight quarters of 2.31%. Options are pricing in an implied move of 3.39% on earnings.

Recent News

  • 04/12: BMO Capital Markets reiterated a Market Perform rating on Caterpillar and thinks the bulls have gotten ahead of themselves, according to a post on Barron’s.com.
  • 04/04: Goldman Sachs reiterated a Buy rating on Caterpillar and added it to the firm’s conviction list citing: (1) structurally higher mid-cycle EPS, (2) exposure to underinvested machinery markets in the early stages of recovery, (3) management strategy transition towards improving returns on capital (vs. market share in the last cycle), and (4) a ~20% underweight average mutual fund position, according to a post on Barron’s.com.
  • 03/21: JPMorgan notes that Caterpillar appears to manage its Finco (finance to facilitate equipment sales) more conservatively than Deere. Caterpillar’s risk is needing to “better manage its forecasting and inventory turns,” according to a post on Barron’s.com.
  • 03/16: Tigress Financial upgraded Caterpillar to Neutral from Underperform citing both the “opportunity and uncertainty” surrounding the company after the Fed’s raided its headquarters amid accounting questions, according to a post on Barron’s.com.
  • 03/08: Axiom Capital contends this may be just the beginning of Caterpillar’s accounting woes following Federal officers raiding its offices in Illinois on Mar. 2, looking for who-knows-what. Then, the New York Times ran a story containing allegations from a Tuck School of Business at Dartmouth College professor alleging tax fraud, according to a post on Barron’s.com.

 Technical Review

Caterpillar’s stock made an all-time high of just above $115 at the beginning of 2011 when economic indexes inverted and the stock got as low as $53.90 at the start of 2016. The stock got as high as $98.64 in 2017 but is stuck in a five-month range. Point and figure charts show a balance area that goes as low as $90 and the 200-day moving average is $88. (Chart courtesy of StockCharts.com)

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Summary

Jim Umpleby took over as CEO in January amid the Trump rally optimism but March brought a new twist. Agents from the Internal Revenue Service, the Federal Deposit Insurance Corp. and the U.S. Department of Commerce participated in the searches at Caterpillar locations in Peoria, East Peoria and Morton, Illinois. The strong dollar has weighed on revenue for multi-nationals and lower metals prices have provided a headwind for mining operators, so Caterpillar could benefit if trends change. The company beat analyst consensus by an average of 13c the last three quarters and the year-ago quarter missed by 1c. Estimize consensus for an Adjusted EPS of $0.62 on revenue of $9.238 bln compares to analyst consensus of $0.62 on revenue of $9.26 bln. Any change in FY2017 guidance is important, as well.

 

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