North America

Earnings Preview: Caterpillar Q3 2017 (CAT)

By: Craig Bowles

Overview

Caterpillar Company (CAT) is slated to report 3Q 2017 earnings before the opening bell on Tuesday, October 24th. 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 $1.26 (range $1.13 to $1.57) (Source: Yahoo! Finance). Consensus was $0.90 three months ago. Before 2014, Caterpillar had typically reported a “clean” EPS figure.
  • Revenues: Analysts expect an increase of 16.0% y/y to $10.63 bln (range $10.22 bln to $11.16 bln).
  • Adjusted Earnings Per Share Guidance (FY2017): Guidance is currently $5.00. Analyst consensus is currently $5.28.
  • Earnings Per Share Guidance (FY2017): Guidance is currently $3.50.
  • Revenues Guidance (FY2017): Guidance is currently $42.0 bln to $44.0 bln. Consensus is $42.94 bln.
  • Caterpillar’s Price/Book 5.5 compares to a five-year average of 3.2; Price/Sales 1.9 compares to a five-year average of 1.0; Price/Cash Flow 11.4 compares to a five-year average of 6.9; Dividend Yield 2.4% compares to a five-year average of 2.9%.
  • Analysts view CAT with 12 (8 three qtrs. ago) Buy, 11 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders sold a net 271,629 (3,809 last qtr) shares during the last three months and a net 434,975 (183,845 last qtr) 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 3.57%. Options are pricing in an implied move of 2.60% on earnings.

Recent News

  • 10/10: Goldman rates Caterpillar a Buy and expects share repurchases, M&A activity, and improved profit margins for the company’s construction industries unit. Suggests the stock could climb 24% in 2018, according to a post on Barron’s.com.
  • 09/27: Caterpillar’s stock price increased nearly 35% in the last 6 months, driven largely by improved margins and improving global sentiment, which could boost global expenditures on infrastructure and mining activities, according to a post on Forbes.com.
  • 09/18: Tigress Financial Partners s bullish on Caterpillar citing that Caterpillar is developing and implementing innovative technologies for its equipment that will drive autonomous and remote-control operations, which will create a new opportunity for the sale and upgrade of Caterpillar equipment, according to a post on Barron’s.com.
  • 09/18: UBS upgraded Caterpillar to Buy from Neutral citing positive results from the firm’s survey of the industry’s spending plans, according to a post on CNBC.com.
  • 09/15: Credit Suisse reiterated Caterpillar as a Top Pick citing a strong balance sheet and an opportunity for significant free-cash-flow generation. CEO Jim Umpleby’s wants to run a more return-focused company versus the previous leadership that placed greater emphasis on its incremental margin target, according to a post on Barron’s.com.
  • 08/30: The U.S. Department of Defense announced Caterpillar won a five-year, $663.6 million government contract, according to a post on Zack’s.com.

Summary

Jim Umpleby took over as CEO in January and the timing couldn’t have been better given the improvement in industrial commodity prices. Caterpillar’s investor day suggested investors can expect a more return-focused company. 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. We shouldn’t forget the Internal Revenue Service’s claim that Caterpillar owes $2 billion in back taxes and fines. Analysts are neutral but have shown more bullishness over the past nine months. Insider selling picked up the past three months. The company beat analyst consensus by an average of 29c the last four quarters. Estimize consensus for an Adjusted EPS of $1.34 on revenue of $10.581 bln compares to analyst consensus of $1.26 on revenue of $10.63 bln. Any change in FY2017 guidance is important, as well.

 

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