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Caterpillar (CAT) Earnings Beat and Revenues Miss in Q4

Caterpillar Inc. 's CAT fourth-quarter 2016 adjusted earnings of 83 cents per share beat the Zacks Consensus Estimate of 65 cents but remained flat year over year. The results continue to reflect low-end user demand across many of the company's businesses due to economic weakness throughout the world. The company's shares dipped 1.13% in pre-market trading , following the release.

Including one-time items such as non-cash charges and higher-than-expected restructuring costs, Caterpillar reported a loss per share of $2.00 in the fourth quarter compared with a loss per share of 16 cents in the prior-year quarter.

In the past one year, the Caterpillar stock has outperformed the Zacks Categorized Machinery - Construction/Mining industry. The company has delivered a return of 65.9%, while the industry gained 63%.

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Revenues

Revenues dipped 13% year over year to $9.57 billion in the quarter, falling short of the Zacks Consensus Estimate of $9.76 billion. Sales were dragged down by lower sales volume due to lower demand as an aftermath of consistent weak commodity prices globally and economic weakness in developing countries. Sales declined for new equipment while aftermarket parts were flat.

Caterpillar witnessed a revenue decline across all regions barring Asia Pacific which registered a 10% rise. EAME fared the worst, registering a 29% plunge in sales, due to the weak economic conditions stemming from low oil prices as well as an uncertain investment environment. In Latin America, Caterpillar witnessed a 16% decline in sales primarily attributable to lower end-user demand as a result of widespread economic weakness and inflation. Sales in North America tumbled 14% due to lower end-user demand for infrastructure, impact of low oil prices as well as an uncertain economic environment.

Costs & Operating Profit

In the quarter, cost of sales increased 4% year over year to $7.541 billion. Gross profit plunged 46% to $2 billion. Selling, general and administrative (SG&A) expenses rose 18% to $1.48 billion. Research and development (R&D) expenses declined 9% year over year to $522 million.

Adjusted operating profit (excluding mark-to-market losses related to pension and OPEB plans and a goodwill impairment charge in Resource Industries) was $318 million compared with $39 million in the prior-year quarter. Lower period costs, a decrease in restructuring costs and favorable variable manufacturing costs led to the improvement, partially offset by lower sales volume.

Segment Results

Machinery and Energy & Transportation (ME&T) sales decreased 14% year over year to $8.9 billion. Sales of Energy & Transportation slumped 15% due to lower end-user demand for all applications. Sales at Resource Industries dropped 13% owing to lower end-user demand across all regions. Construction Industries sales dropped 13% as a result of lower demand, offset by favorable changes in dealer inventories.

The ME&T segment reported an operating loss of $1.34 billion compared with a loss of $288 million in the year-ago quarter. At the Energy & Transportation segment, operating profit dropped 14% as a result of lower sales volume. Operating profit improved 88% at Construction Industries due to lower period costs. The worst performance was witnessed at Resource Industries, with the segment incurring a loss of $711 million in the quarter compared with a loss of $80 million a year ago due to lower sales volume and unfavorable price realization.

Financial Products' revenues slipped 1% to $742 million owing to unfavorable impacts from returned or repossessed equipment, mainly in North America and lower average earning assets in Latin America. Financial Products' profit was $149 million in the quarter, compared with $191 million in the prior-year quarter.

Financial Position

Caterpillar ended fiscal 2016 with cash and short-term investments of $7.17 billion, up from $6.46 billion at 2015 end. Total debt-to-capital ratio was 51% at the 2016-end, up from 46% at 2015 end. The debt-to-capital ratio at ME&T was 41% as of Dec 31, 2016, higher than 39% as of Dec 31, 2015, but within the company's target range of 30-45%.

Total cash flow from operating activities in 2016 was $5.6 billion, compared with $6.7 billion in the prior year. Operating cash flow at ME&T declined to $3.857 billion in 2016 from $5.175 billion in the prior year.

Backlog

At the end of the 2016, Caterpillar's backlog was at $12.1 billion. On a year-over-year basis, order backlog declined by about $900 million due to decline in Energy & Transportation and Construction Industries, partially offset by an increase in Resource Industries. On a sequential basis, backlog however increased $500 million aided by increase in Construction industries and Resource industries negated by decline in Energy & Transportation.

Caterpillar, Inc. Price, Consensus and EPS Surprise

Caterpillar, Inc. Price, Consensus and EPS Surprise | Caterpillar, Inc. Quote

Fiscal 2016 Performance

Caterpillar reported adjusted earnings per share of $3.42 in fiscal 2016, down 36% from $5.35 in fiscal 2015, but ahead of the Zacks Consensus Estimate of $3.24. Earnings also surpassed management guidance of $3.25. Revenues were reported at $38.5 billion, down 18% year over year. Revenues fell short of the Zacks Consensus Estimate of $38.6 billion as well as management guidance of $39 billion.

Guidance

Caterpillar estimates revenues around $36 to $39 billion in fiscal 2017. The mid-point of the range depicts a 3% decline from the revenues reported in fiscal 2016. Caterpillar expects earnings per share (excluding restructuring costs) of $2.90 in fiscal 2017. This reflects a 15% drop for 2016 earnings.

The company stated that even though commodity prices are at higher levels than a year ago, and quoting interest in mining products has improved miners' capital spending will remain flat in 2017 after several years of decline. In Construction, sales in China is showing signs of recovery and if the Brazilian economy begins to recover from recession it would lead to higher sales in Brazil. However, North America and EAME will remain deterrents. While better prospects lie in the form of improved economic growth and increased infrastructure spending, the availability of used equipment has negatively impacted sales in North America during 2016 and it will persist in 2017. Sales in Africa/Middle East will be down again in 2017 due to overall economic weakness and continued pressure on economies that are tied to oil revenues. Further, Brexit remains a overhang in Europe.

In Energy & Transportation, gas compression remains strong and if oil prices rise and stabilize, it would be positive for the businesses that support drilling and well servicing. However, rail remains challenged with low traffic volume and a significant number of idle locomotives. Further, weakness in shipbuilding, weak power generation sales and lower industrial engine sales to original equipment manufacturers will dent the segment's sales.

Zacks Rank & Key Picks

Caterpillar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space include Altra Industrial Motion Corp. AIMC , Actuant Corp. ATU and Apogee Enterprises, Inc. APOG . All three of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Altra Industrial Motion has a positive average earnings surprise of 8.06% in the last four quarters. Actuant generated a positive average earnings surprise of 11.47% in the trailing four quarters. Apogee has delivered an average positive earnings surprise of 13.24% in the last four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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