3 Things to Watch When Caterpillar Reports Earnings This Week

Caterpillar (NYSE: CAT) Analysts see Caterpillar’s

Q2 earnings per share improve 4% year over year despite 1% lower revenue.

Cost cutting and share repurchases should boost its EPS.

The company beat Street estimates in each of the past two quarters by wide margins.

*Excludes restructuring. Source: Caterpillar

Overview by segment: What to expect

Resource Industries: Expect dismal numbers since the mining industry is still in doldrums. Caterpillar’s mining-equipment retail sales slumped 46% for the three months ended May.

Construction Industries: This should be strongest segment, backed by an uptick in global construction activity, especially in the Americas.

Energy & Transportation: Consistent performer as the segment serves diverse industries. Q2 performance will likely be in line with previous year.

Beyond the numbers

But investors in a cyclical company need to look beyond its quarterly top

and bottom line numbers to see where it’s really headed.

So here are three key things you should watch for in Caterpillar’s upcoming

report…

1. Is Energy & Transportation slowing down?

E&T was the largest contributor to Caterpillar’s revenue and operating profits last year.

The division has hugely helped offset weakness in the company’s mining business in recent quarters.

1. Look for potential signs of weakness in Caterpillar’s E&T business.

Source: Caterpillar

But some end markets maybe losing steam…Alcoa expects the global industrial gas turbine market to drop 8%-12% this year.Caterpillar’s retail sales data for the three months ended May exhibits weakness

in some key E&T markets, as evidenced below.

Source: Caterpillar

2. Are orders and backlog growing?

Caterpillar ended its first quarter with 7% higher backlog value, at $19.3 billion, versus 2013.

It’s worth noting that the entire incremental Q1 backlog came from its E&T business.

A growing backlog value indicates higher future potential revenue.

Keep an eye on Caterpillar’s Q2 order flow and backlog.

Are heavy-equipment customers spending more? Source: Caterpillar

3. Is production and inventory improving?

Caterpillar sells primarily through its dealers, so its sales depend on their inventory levels.

Higher production in Q2 will mean normalizing inventory and improved demand from dealers. In contrast, further unwinding of stocks by dealers will indicate weak end-user demand.

Watch for Caterpillar’s operating rate and inventory levels.

Source: Caterpillar Analyst Day presentation

In a nutshell

Until mining markets recover, the onus will be on Caterpillar’s construction and E&T businesses to keep the company going. So any weakness in either business is a yellow flag.

Backlog will be the key to Caterpillar’s recovery, since falling orders and backlog will mean longer-term pain for the company, and its investors. So watch that metric.

In a nutshell

Restructuring benefits encouraged Caterpillar to improve its full-year EPS guidance by $0.25 in Q1. But cost cutting has its limitations, so investors may not have much to look forward to until Caterpillar’s sales pick up.

Pay heed to the company’s long-term plans in its upcoming earnings call, especially cash flow projections. More cash should mean greater returns for you, as dividends and share buybacks, in the near future.

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