Caterpillar Inc. Earnings: 3 Key Things to Watch
Caterpillar Inc. Earnings: 3 Key Things to Watch
Caterpillar will release its first-quarter numbers on April 22. To understand where the company’s headed amidst challenging business conditions, here are the three key things investors need to watch in the earnings report.
1 Order rates and backlog
A bleak picture
Data source: Caterpillar’s retail sales statistics. Chart by author
Caterpillar’s machine sales dropped dramatically during the three months ended February.
Jan'
15
Feb'
15
Mar
'15
Apr'1
5
May
'15
June
'15
July
'15
Aug'
15
Sep'
15
Oct
'15
Nov
'15
Dec
'15
Jan'
16
Feb'
16
-25%
-20%
-15%
-10%
-5%
0%
Caterpillar Total Retail Machine Sales rolling three-month period ending vs prior year
Troubling signsCaterpillar’s backlog declined 25% to $13 billion in
2015.CAT received “very few” orders from mining customers
last year even as orders for its oil drilling and well-servicing equipment slumped 90%. Meanwhile, its Q4 construction-equipment sales dropped 18% year over year as demand from North America, China, and Brazil weakened.
The downward trend in retail sales indicate further weakness in CAT’s key end markets.
What to watchA rapidly depleting backlog could push CAT’s revenue to dangerously low levels if order rates don’t pick up soon.
2 Outlook for 2016 and beyond
Caterpillar provided its guidance for the first quarter during a presentation in March:
*excluding restructuring costs. Source: Caterpillar’s presentation at Bank of America Merill Lynch Industrials Conference, March 2016.
Surprisingly, CAT reaffirmed its full-year guidance despite a dismal outlook for the first quarter.
*excluding restructuring costs. Source: Caterpillar’s presentation at Bank of America Merill Lynch Industrials Conference, March 2016.
Things to watch for
Did Caterpillar’s Q1 profits decline because of a quarter-specific event or weaker end markets?
If CAT sticks to its full-year guidance, how does it expect to make up for the Q1 losses through the rest of the year?
If CAT lowers its guidance, what are the factors and how could they affect the company in the longer run?
3 Restructuring and margins
Story so far
Caterpillar is aggressively restructuring in the wake of challenging business conditions.
CAT’s last outlined plans include:cutting down total expenses by $900 million in
2016.reducing headcount by 10,000 through 2018.
What to watch
If CAT reveals fresh restructuring initiatives, it could mean:higher restructuring costs that could
eat into its margins in the near future.A delayed turnaround as restructuring
has long-term implications.
Foolish bottom line
Caterpillar’s first quarter will, undoubtedly, be a weak one. That said, investors need to look beyond the headlines when the company reports this week, and focus on how CAT tackles headwinds and positions itself for the next growth cycle.
The next billion-dollar iSecret The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-
new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early-in-
the-know investors! To be one of them, just click here.