Shares of Caterpillar (CAT) are trading with decent gains of over 3% in Monday's trading session. The move comes as a surprise after the manufacturer of construction and mining equipment lowered its full year outlook for 2013 at its first quarter earnings presentation.
First Quarter Results
Caterpillar generated first quarter revenues of $13.21 billion, down 17% on the year before. Revenues fell by a similar percentage compared to the fourth quarter in 2012, and fell short of consensus estimates of $13.8 billion.
Sales were severely impacted by inventory changes as dealers normally built up inventory in order to prepare for the spring and summer. Caterpillar points out that it boosted its actual inventories by $2 billion in the first quarter of 2012, while it cut inventories by half a billion over the past quarter.
Net profits for the period fell 45% to $880 million, coming in at $1.31 per diluted share. Earnings per share missed analysts consensus estimates of $1.46 per share.
CEO and Chairman Doug Oberhelman commented on the first quarter, "Considering the magnitude of the decline in sales and production, I am very pleased with our performance in the first quarter. We did a good job managing costs and made even more progress on inventory reduction."
Weakness in revenue trends was seen across all continents and in all business units of the firm. Power systems performed relatively good, reporting a 12% decline in revenues. Construction revenues fell by 17% while the resource business saw its sales fall some 23%.
Caterpillar performed relatively well in Latin America, showing a 6% revenue decline. Revenues in North America, EMEA and Asia/Pacific fell between 17 and 22%.
Outlook For Remainder Of The Year
Previously Caterpillar guided for full year revenues of $60 to $68 billion on which the firm expected to earn between $7.00 and $9.00 per share.
Given the first quarter performance, Caterpillar has negatively revised its full year revenue target to $57 to $61 billion, on which it expects to earn around $7.00 per share. The new guidance implies that full year revenues are expecting to fall some 10.5% compared to 2012, while earnings are expected to fall by 17.5%.
Oberhelman commented on the outlook, "What's happening in our business and in the economy overall is a mixed picture. Conditions in the world economy seem relatively stable, and we continue to expect slow growth in 2013."
Caterpillar ended its first quarter with $6.0 billion in cash and equivalents. The company, including its financial division, holds over $40 billion in short and long term debt, for a very sizable net debt position.
Factoring in a 2.5% jump on Monday, the market values the firm around $54 billion. This values the firm's equity at 0.9 times annual revenues and roughly 12 times annual earnings.
Caterpillar currently pays a quarterly dividend of $0.52 per share, for an annual dividend yield of 2.5%.
Some Historical Perspective
Over the past decade shares of Caterpillar have tripled as the company benefited from the boom in agricultural and other resource commodities. Shares steadily rose to highs around $90 in 2008 before they fell back some 75% towards $25 during the 2009 recession.
Shares steadily recovered to all time highs around $115 back in 2011 and 2012, but have seen a 30% correction ever since.
Between 2009 and 2012, Caterpillar has doubled its annual revenues from $32.4 billion to $65.9 billion. Net income rose from merely $895 million to $5.7 billion over the same time period. 2013 will be the first year in a while in which operating performance is deteriorating.
While Caterpillar posts a severe revenue and earnings miss for the first quarter, accompanied by a lowered full year outlook, investors are comforted by remarks made in the company's earnings conference call.
While Caterpillar displayed weakness across the board, it was notably the mining equipment business which disappointed. This hurts the bottom line even more as it is the most profitable business of the firm. Yet the company thinks the pullback in miner spending is temporarily, and it sees stability in the construction markets in the US and China.
Another comforting factor is that sales declines are exaggerated because of the significant inventory reduction, which accounts for the majority of sales declines. Adjusting for lower inventory levels, sales would have fallen within single digit numbers.
The company furthermore surprised the market to some degree by targeting $1 billion in share repurchases for the remainder of the year, taking advantage of a lower share price. At current price levels, Caterpillar could retire almost 2% of its shares outstanding over the coming eight months.
The bad news which Caterpillar reported on Monday has already been communicated to the market, as shares have missed out on the wider equity rally over the past year, losing almost a quarter of its value. The green shoots which Caterpillar sees suggest the worst is over, but 2013 will not be a great year. Still, the company's equity is valued at fair multiples while paying a decent dividend yield.
Yet I am a little bit concerned about the sizable debt position of the company which does not bode well in case a new recession or severe economic slowdown would materialize.
I remain on the sidelines.