Earnings Preview: Caterpillar

| About: Caterpillar Inc. (CAT)


Caterpillar’s business is stabilizing, which means that the company can continue its strong performance after its upcoming earnings report.

The mining industry is expected to bottom out this year, and this could be a revival of Caterpillar’s fortunes.

Caterpillar’s focus on cost control and attractive valuation makes it an enticing bet for the long run.

Construction and mining equipment giant Caterpillar's (NYSE:CAT) performance this year has been outstanding. The stock is up around 13% after Caterpillar posted solid fourth-quarter results back in January. Caterpillar's profit was better-than-expected on the back of cost-control measures and an increase in demand for building equipment. As a result, Caterpillar was able to negate the effects of a downbeat mining industry.

However, Caterpillar's resolve will be put to test on April 24, when the company is expected to release its first-quarter results. Let us take a look at what is expected from Caterpillar and if it could sustain its momentum going forward.

Targets to meet

According to analysts, Caterpillar is expected to report revenue of $13.24 billion, almost flat from the year-ago quarter. However, its earnings are expected to drop to $1.23 per share from $1.31 in the year-ago quarter.

This is quite natural as Caterpillar is expected to see weakness in the mining business this year. The company expects mining sales to decline another 10% this year. However, the reason why Caterpillar shares have jumped this year is due to its better-than-expected outlook. When Caterpillar released results in January, it projected earnings forecast of $5.85 a share, $0.07 better than analysts' estimates. Moreover, analysts are of the opinion that the mining industry will bottom out this year and things should get better in the future.

Caterpillar has been making some good moves to control costs, which is why it could continue its slow and steady recovery going forward.

Staying afloat

Since things aren't going well, Caterpillar is focused on reducing costs. Excluding the cost absorption impact from inventory, it managed to reduce costs in manufacturing, R&D, and SG&A by $1.2 billion last year. This was a result of favorable material costs, lower incentive pay, and short-term actions such as temporary plant shutdowns, layoffs, and certain restructuring actions like 2,000 fewer management and support employees, 4,500 fewer production employees, and the closing, downsizing, or consolidation of a number of manufacturing facilities.

Also, though mining was negative, Caterpillar emerged as a diverse company by serving a wide range of industries across the globe. And while sales declined in construction and power systems, that decline was small as compared to resource industries. Moreover, Caterpillar has also improved its market position in machines, and made particularly strong gains with excavators in China.

In addition, Caterpillar sees encouraging signs of an improvement in the world economy. This is a positive sign for Caterpillar's construction and power systems segments, with each expected to be up by about 5% in 2014. However, a sales decline of about 10% in the resource industry segment is expected, despite the improvement in the economic climate and strong production at mines.

Caterpillar is expected to continue its restructuring in 2014 as well. It is restructuring its Gosselies, Belgium, facility by reshaping the supply base for more efficient sourcing, improving factory efficiencies and workforce reductions. These are designed to improve the competitiveness of its European manufacturing footprint by refocusing its current Gosselies operations on final machine assembly, test, and paint, with limited component and fabrication operations.

Investor-friendly moves

In addition, Caterpillar is focusing on returning cash to shareholders to deliver value in difficult circumstances. The company was on track to repurchase $1.7 billion of stock in the first quarter, driven by a new record operating cash flow of about $9 billion for machinery and power systems.

In addition, Caterpillar had also raised its 2013 quarterly dividend by 15%. Considering that Caterpillar's payout ratio is still at 30%, strong cash flow generation going forward through focus on cost-reductions should lead to further dividend increases. In fact, Caterpillar has authorized a new $10 billion share repurchase program, which should support its earnings and deliver returns to investors.


Caterpillar has a trailing P/E ratio of 16.84 and a forward P/E ratio of 14.08. This indicates that analysts are hopeful about an improvement in earnings going forward due to a slight improvement in the business and cost reduction. Moreover, Caterpillar's earnings are expected to grow at an annual rate of 13.45% for the next five years, which makes an investment in the stock a good proposition at its current valuation levels.


Caterpillar is steadily getting better this year. The company is doing the right thing by reducing costs and focusing on making its operations more efficient. In addition, the dividend-paying nature and focus on share buybacks makes Caterpillar a solid investment. So, even if Caterpillar manages to put in a bad earnings report, it could be a good investment for the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.