Caterpillar (NYSE:CAT) released its earnings for Q4, in which the EPS was $0.74 -- higher than market estimates. And although the company revised down its outlook for 2016, shares of CAT rose in the past few days; in part due to the recent rally of oil prices. Let's examine some of the latest developments related to the heavy machinery manufacturer.
The company slightly lowered its revenue outlook for 2016, which was estimated back in Q3 to be 5% below the 2015 revenue. Now, Caterpillar estimates its revenue will reach, on average, $42 billion or 10% lower than the revenue last year.
The earnings per share excluding restructuring costs is estimated to be $4, which is 14% below the EPS recorded in 2015.
All three of the company's major segments will record lower sales in 2016, but the sharpest fall is expected in the Resource Industries sector - sales are projected to contact by 15-20%, year on year. And even the Construction Industries are expected to present a 5% to 10% drop in sales - in the U.S. this segment is still estimated to expand. The ongoing low oil prices and the slow shift of countries such as U.S. and China away from mining coal will keep cutting down the demand for Caterpillar's products. The main factor that will have a positive impact on CAT's bottom line will come from the cost structure.
In terms of cash flow, if we assume a similar ratio between operating cash flow and revenue in 2016 (a simplistic assumption to estimate operating cash flow) as was the case in 2015 (11%), then the operating cash flow could reach $4.6 billion this year,
Source: Caterpillar and Author's calculation
Based on the company's estimated capex and assuming no changes to its dividend or a new shares buyback program, then CAT will end 2016 with a net positive cash flow, as indicated in the table above. So even though revenue is expected to be down this year, the company may not have to borrow in order to finance its dividend and investments.
CAT stuck between currency wars
It's worth noticing that the impact of unfavorable changes in foreign currencies on the company's bottom line was around $1 billion for 2015. And if the U.S. dollar continues to appreciate as it did back in 2015, this could further weigh on CAT's profits. Based on the latest FOMC meeting statement, the Fed may not raise rates as fast as it previously estimated, which may hold back the U.S. dollar from sharply appreciating against major currencies. But if the other central banks continue to aim towards devaluing their currencies, then the Fed won't have to raise rates this year for the U.S. dollar to gain strength. Just recently, the BOJ decided to introduce negative rates on a portion of banks' reserves; the ECB is planning to announce of more monetary stimulus in the coming months. And even the PBOC also brought down its cash rate and may allow the U.S. dollar to appreciate against the RMB this year. Based on the company's outlook, the management estimates the negative price realization to slash profits by $200 million - mostly due to a stronger U.S. dollar. This estimate could be a bit low if the U.S. dollar continues to rally as it did in the past several weeks.
Caterpillar will face another tough year with lower revenue and cash flow. But if the company remains prudent doesn't take on more debt and further slash its costs this could partly offset the negativity towards the stock. Nonetheless, this CAT is still likely to see further falls if and once oil prices resume their descent. For more see: Why Caterpillar isn't pulling up?
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