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By Brendan Gilmartin

Overview

Caterpillar (CAT) is scheduled to report 4Q 2013 earnings before the opening bell on Monday, January 27. The results are typically released at 7:30 a.m. EST with a conference call slated for 11:00 a.m. Caterpillar shares have been selling off in recent months amid concerns over the outlook for the global economy, particularly in China. Keep an eye on the index futures at the time of the release given the potential magnitude of these results.

Outliers & Strategy

Caterpillar typically reports a figure for Earnings Per Share (EPS) that compares with consensus estimates. The Street is looking for Caterpillar to deliver EPS of $1.28 (range is $1.20 to $1.39) on revenue of $13.64 bln, down 15.1% from the year-ago period (Source: Yahoo! Finance).

Look for Caterpillar to possibly provide an updated forecast for 2013:

  • Earnings Per Share Guidance (FY2014). The current consensus is $5.78, compared with estimates of $5.49 for 2013.
  • Revenues Guidance (FY2013): Caterpillar indicated back in October it expects sales and revenues to be flat with 2013, plus or minus 5%. Using the 2013 consensus of $54.86 bln it would imply a range of $52.18 bln - $57.60 bln.

Sympathy Plays: Cummins Inc. (CMI), Deere & Co. (DE), Terex Corp. (TEX) & Joy Global (JOY).

The options market is pricing in a 3% move off earnings, while the average change in reaction to earnings is 4%.

Caterpillar shares are off more than 4% over the past week amid concerns about lower sales in Asia and softer demand for mining equipment. But these factors are well-known and Caterpillar has missed Street estimates over four consecutive quarters, implying the market is bracing for another tepid quarter. But with 4Q results telegraphed by the company in its previous earnings release, much of the focus will center on the outlook for 2014, whereby Caterpillar indicated revenue (implied range of $52.18 bln - $57.60 bln based on Street estimates) would be in-line with 2013. A positive adjustment to that would be seen as a positive surprise and could lift Caterpillar shares back toward the recent peak near $92.50.

Recent News

01/14: Analysts at UBS reportedly advised investors to be cautious on Caterpillar going into the 4Q earnings release, according to a post on Barron's Online. The firm noted that lack of growth in mining and power, weakness in the Yen, and lower oil prices could limit earnings and possibly result in a reduced forecast for 2014.

12/11: Caterpillar voted to maintain the quarterly cash dividend of $0.60 per share. The current yield is 2.71%.

12/11: Caterpillar shares slid 1.32% after Joy Global posted weaker than expected earnings and guidance, citing difficult market conditions in the surface-mining equipment space.

Technical Review

Caterpillar shares have been sliding ahead of the closely-watched 4Q earnings release. The shares are at a key support near $88 (was previously resistance) - a level going back to May of this year. Should earnings significantly surprise to the upside, look for a run back toward the recent high near $93.00. Conversely, support is at the aforementioned $88-level, with downside risk to $87.00 (50-Day SMA), and $84.00 if earnings come in meaningfully below estimates. (Chart courtesy of StockCharts.com)

(click to enlarge)

Summary

Caterpillar shares are slipping ahead of the 4Q earnings release, tracking the broader market declines, amid the weaker economic backdrop in China and declining metals prices, crimping demand for mining equipment. But with soft sell-side sentiment and the shares trading at just 15.3x estimated 2014 earnings and a mere 1.0x sales, in-line with its historic multiple, risk appears limited. Further, the outlook for 2013 is priced into the shares, the Street will turn its focus toward the outlook for 2014. After a recently weak GDP and manufacturing report from China and lower metals prices, a tepid forecast for 2014 may be priced in, with valuation, share repurchases, and a solid yield limiting the downside.

DISCLAIMER: By using this report, you acknowledge that Selerity, Inc. is in no way liable for losses or gains arising out of commentary, analysis, and or data in this report. Your investment decisions and recommendations are made entirely at your discretion. Selerity does not own securities in companies that they write about, is not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. No content published as part of this report constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Source: Earnings Preview: Caterpillar Q4 2013