Caterpillar Earnings: Taking a Deep Dive

Caterpillar

Caterpillar (NYSE:CAT) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It operates in two segments: machinery and power systems, and financial products. Machinery and power systems represents a total of construction industries, resource industries, power systems, and all other segments and related corporate items and eliminations. The financial products segment includes the company’s financial products segment and includes Cat Financial and Caterpillar Insurance Holdings Inc.

In general, Caterpillar is a read on the global manufacturing/construction activity. In that regard, we would suspect that activity is up because Caterpillar is currently trading up 5.8 percent on the day of reporting quarterly results that blew past analysts’ estimates. However, shares are still down 3 percent over the past 12 months, while the S&P 500 index was up about 25 percent. So what good news came out of this announcement?

A Strong but Weak Quarter

First — the buyback. The company announced it intends to buy back $1.7 billion worth of its stock in the first-quarter, which will complete the existing authorization and will lead to stronger earnings per share as the float is reduced. Since it was going to complete its buyback, Caterpillar’s board approved a new $10 billion authorization good until 2018. Earnings and revenues were strong. In the fourth-quarter, Caterpillar earned $1.54 on $14.4 billion in revenue compared to expectations for $1.28 on $13.6 billion.

The bad? Sales were down year-over-year by 10 percent while earnings were boosted by cost cuts. Asia continues to be a major headwind due to reduced mining activity. Sales were down 30 percent in the region. For the full year, sales were down 16 percent to $55.66 billion, which cut earnings by 31 percent to $5.75 compared to the year 2012.

Why the weakness? Well, there has been weakness in its mining unit as gold and copper prices were under pressure although its power systems unit continued to grow. Further, the company has a declining backlog. With its focus on mining equipment and construction machinery, Caterpillar is very exposed to emerging markets, which have faced some challenges of late. Latin American sales were down 20 percent due to lower metals prices. Some cost cutting measures include the company having a $1.2 billion cut expenses, driven by nearly a 10,000 employee reduction. Latin American sales were down 20 percent.

Mining Is Hurting

While Caterpillar is benefiting from improvements in construction and power, mining continues to be a major headwind for results. Caterpillar’s mining unit reported a 48 percent decline in revenue. Much of this stems from miners have high debt loads and are being forced to cut capital expenditures, exploration and development budgets amid lower-end prices. With lower budgets in these areas it stands to reason that Caterpillar’s mining revenue will continue to fall. It could be helped by copper if it can get back up to the $3.65-$3.75 level and gold and silver stay above $1300 and $22, respectively. If not, these budgets will be slashed and mining will suffer.

Outlook

For 2014, the company expects to generate the same amount of revenue as it did in 2013 within a few percentage points. Excluding continued restructuring costs as the company continues to cut costs, it expects to earnings to come in at the $5.85 mark.

Stock Statistics

Shares of Caterpillar have a forward p/e of 15.5 and yields 2.6 percent. The stock is up about 5.85 on heavy volume at the time of this writing. The stock is trading at $91.90. This pop gives traders a chance to take profits. Those looking to invest in the name should wait for a pullback here in 2014.

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