3 Things to Watch When Caterpillar Reports Earnings This Week

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Caterpillar stock may give up its recent gains if the company doesn't deliver on these three areas this week.

Transcript of 3 Things to Watch When Caterpillar Reports Earnings This Week

  • 3 Things to Watch When Caterpillar Reports Earnings This Week
  • Caterpillar (NYSE: CAT) Analysts see Caterpillars 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. Caterpillars 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 its really headed. So here are three key things you should watch for in Caterpillars upcoming report
  • 1. Is Energy & Transportation slowing down? E&T was the largest contributor to Caterpillars revenue and operating profits last year. The division has hugely helped offset weakness in the companys mining business in recent quarters. 1. Look for potential signs of weakness in Caterpillars 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. Caterpillars 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. Its 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 Caterpillars 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 Caterpillars operating rate and inventory levels. Source: Caterpillar Analyst Day presentation
  • In a nutshell Until mining markets recover, the onus will be on Caterpillars 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 Caterpillars 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 Caterpillars sales pick up. Pay heed to the companys 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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