3 Things to Watch When Caterpillar Reports Earnings This Week
3 Things to Watch When
Earnings This Week
Caterpillar (NYSE: CAT)
Analysts see Caterpillar’s
Q2 earnings per share
improve 4% year over
year despite 1% lower
Cost cutting and share
repurchases should boost
The company beat Street
estimates in each of the
past two quarters by wide
*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
1. Is Energy & Transportation slowing down?
E&T was the largest
contributor to Caterpillar’s
revenue and operating profits
The division has hugely
helped offset weakness in the
company’s mining business in
1. Look for potential signs
of weakness in Caterpillar’s
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.
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
A growing backlog value
indicates higher future
Keep an eye on
Caterpillar’s Q2 order
flow and backlog.
Are heavy-equipment customers spending more?
3. Is production and inventory improving?
Caterpillar sells primarily
through its dealers, so its
sales depend on their
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-
Watch for Caterpillar’s
operating rate and
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
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
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
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