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Caterpillar Inc. Earnings: 3 Key Things to Watch
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Caterpillar Inc. Earnings: 3 Key Things to Watch

Apr 12, 2017

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Page 1: Caterpillar Inc. Earnings: 3 Key Things to Watch

Caterpillar Inc. Earnings: 3 Key Things to Watch

Page 2: 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.

Page 3: Caterpillar Inc. Earnings: 3 Key Things to Watch

1 Order rates and backlog

Page 4: Caterpillar Inc. Earnings: 3 Key Things to Watch

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

Page 5: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 6: Caterpillar Inc. Earnings: 3 Key Things to Watch

What to watchA rapidly depleting backlog could push CAT’s revenue to dangerously low levels if order rates don’t pick up soon.

Page 7: Caterpillar Inc. Earnings: 3 Key Things to Watch

2 Outlook for 2016 and beyond

Page 8: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 9: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 10: Caterpillar Inc. Earnings: 3 Key Things to Watch

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?

Page 11: Caterpillar Inc. Earnings: 3 Key Things to Watch

3 Restructuring and margins

Page 12: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 13: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 14: Caterpillar Inc. Earnings: 3 Key Things to Watch

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.

Page 15: Caterpillar Inc. Earnings: 3 Key Things to Watch

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