North America

Earnings Preview: Caterpillar Q2 2017 (CAT)

By: Craig Bowles

Overview

Caterpillar Company (CAT) is slated to report 2Q 2017 earnings before the opening bell on Tuesday, July 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.

Outliers & Strategy

Key measures:

  • Adjusted Earnings Per Share (EPS) or Earnings Per Share (EPS) Excluding Items: The Street estimate is $1.25 (range $1.10 to $1.50) (Source: Yahoo! Finance). Consensus was $0.95 three months ago. Before 2014, Caterpillar had typically reported a “clean” EPS figure.
  • Revenues: Analysts expect an increase of 6.0% y/y to $10.96 bln (range $10.52 bln to $11.54 bln).
  • Adjusted Earnings Per Share Guidance (FY2017): Guidance is currently $3.75. Analyst consensus is currently $4.27.
  • Earnings Per Share Guidance (FY2017): Guidance is currently $2.10.
  • Revenues Guidance (FY2017): Guidance is currently $38.0 bln to $41.0 bln. Consensus is $40.71 bln.
  • Caterpillar’s Price/Book 4.7 compares to a five-year average of 3.2; Price/Sales 1.6 compares to a five-year average of 1.0; Price/Cash Flow 9.5 compares to a five-year average of 6.9; Dividend Yield 2.9% compares to a five-year average of 2.9%.
  • Analysts view CAT with 10 (8 two qtrs. ago) Buy, 10 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders sold a net 3,809 shares during the last three months and a net 183,845 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 from 2011 to 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 2.93%. Options are pricing in an implied move of 3.11% on earnings.

Recent News

  • 07/11: Axiom Capital maintained a sell rating on Caterpillar but notes iron ore exports from Australia and Brazil increased 9 percent year on year in June. U.S. steel imports in June rose $135 and are on pace to do the same in July, according to a post on Barron’s.com.
  • 07/03: Caterpillar allegedly “failed to submit numerous required export filings with the government in recent years.” The failure to file could be part of a scheme to avoid taxes. This follows a government raid on Caterpillar’s headquarters back in March. The Internal Revenue Service claims Caterpillar owes $2 billion in back taxes and fines, according to a post on Barron’s.com.
  • 06/28: Deutsche Bank downgraded Caterpillar to Hold from Buy, arguing that its stock had moved “past the point of maximum optimism.” Credit Suisse argues that their recent dealer survey shows that Caterpillar is “set up well to raise estimates,” according to a post on Barron’s.com.
  • 06/28: Credit Suisse reiterated an Outperform rating on Caterpillar but is worried the company not ramping production fast enough, according to a post on StreetInsider.com.
  • 05/11: BofA Merrill Lynch upgraded Caterpillar to Buy from Neutral citing upcoming catalysts of monthly retail sales accelerating, expects the company to raise its dividend in the summer, and expects “another big beat and raise” come July and analyst day in September, 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. 2017’s high of $109.21 is approaching the previous all-time high. Balance area support is $100 and the 200-day moving average at $95 is an even bigger balance area. (Chart courtesy of StockCharts.com)

Summary

Jim Umpleby took over as CEO in January and the timing couldn’t have been better as by the improvement in industrial commodity prices. The Internal Revenue Service claims Caterpillar owes $2 billion in back taxes and fines. The strong dollar had weighed on revenue for multi-nationals and lower metals prices had provided a headwind for mining operators, so the reversal in 2016/2017 appears to be benefiting Caterpillar. The company beat analyst consensus by an average of 26c the last four quarters. Estimize consensus for an Adjusted EPS of $1.21 on revenue of $10.839 bln compares to analyst consensus of $1.25 on revenue of $10.960 bln. Any change in FY2017 guidance is important, as well.

 

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