North America

Earnings Preview: Caterpillar Q4 2016 (CAT)

By: Craig Bowles

Overview

Caterpillar Company (CAT) is slated to report 4Q 2016 earnings before the opening bell on Thursday, January 26th. 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:

  • Earnings Per Share (EPS) Excluding Items: The Street estimate is $0.66 (range $0.53 to $0.74) (Source: Yahoo! Finance). Consensus was $0.99 three months ago. Before 2014, Caterpillar had typically reported a “clean” EPS figure.
  • Revenues: Analysts expect a decrease of 10.8% y/y to $9.84 bln (range $9.26 bln to $10.49 bln).
  • Adjusted Earnings Per Share Guidance (FY2017): Guidance on November 29th was “below the $3.25 that analysts expected.” Analyst consensus is currently $3.00 (range $2.31 to $3.35).
  • Earnings Per Share Guidance (FY2017): Guidance was reduced throughout the year last year.
  • Revenues Guidance (FY2017): Guidance on November 29th viewed $38.0 bln as a “reasonable midpoint.” Consensus is $37.99 bln (range $34.95 bln to $40.51 bln).
  • Caterpillar’s Price/Earnings on trailing earnings is 87.2 compared to a five-year average of 19.6; Price/Book 3.5 compared to a five-year average of 3.2; Price/Sales 1.4 compared to a five-year average of 1.0; Price/Cash Flow 9.5 compared to a five-year average of 6.9; Dividend Yield 3.3% compared to a five-year average of 2.9%.
  • Analysts view CAT with 8 Buy, 12 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insider trades have all been on the sell side since July. Caterpillar’s 2007 $7.5 billion stock buyback program ran through 2015. In January 2014, the company approved another $10 billion through 2018.
  • 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 before showing some improvement in 2016. (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 3.09%. Options are pricing in an implied move of 3.78% on earnings.

Recent News

  • 12/30: Barclays believes Caterpillar is fairly priced given the new normal of 15x future growth of $8 in normalized earnings discounted back to the stock price today, according to a post on Barron’s.com.
  • 12/14: Barclays notes that while machinery stocks like Caterpillar have priced in the positive impact from tax cuts, infrastructure spending, and a stronger economy, the stocks don’t necessarily reflect the negative impact from rising commodity prices, according to a post on Barron’s.com.
  • 12/05: JPMorgan is cautious on Caterpillar’s valuation after management described the Thomson First Call consensus 2017 adjusted EPS of $3.25 (at 11/29) as “too optimistic considering expected headwinds,” according to a post on Barron’s.com.
  • 12/02: RBC was surprised by Caterpillar’s warning on earnings but investors remain focused on optimism toward prospects for more buoyant construction, infrastructure, and energy activity as well as potential for more accommodating corporate policies, which could continue to dominate sentiment and keep multiples elevated, 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 has struggled since. Point and figure technicians have a tentative bullish price objective of $111 and the 200-day moving average is $82. (Chart courtesy of StockCharts.com)

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Summary

CEO Doug Oberhelman retired a year early on January 1st and was replaced by Jim Umpleby, who headed up the energy and transportation businesses. The strong dollar has weighed on revenue for multi-nationals and lower metals prices have provided a headwind for mining operators, so Caterpillar has had to deal with both of these issues. The company is undergoing “significant restructuring and cost reduction actions.” Three of the past four quarters beat analyst consensus by an average of 9c and the one quarter that missed was by 1c. Estimize consensus for an EPS Excluding Items of $0.75 on revenue of $9.905 bln compares to analyst consensus of $0.66 on revenue of $9.84 bln. More clarity on FY2017 guidance is important, as well.

 

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