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Will Restructuring Reverse Caterpillar's (CAT) Dismal Trend?
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On Aug 12, 2016, we issued an updated research report on Caterpillar Inc. (CAT - Free Report) – the mining and equipment behemoth. We believe cost-cutting measures and improvement in construction will bail out the company that is going through a rough patch, grappling with weak mining and post-Brexit uncertainty.
Caterpillar’s recent results continue to mirror tough market conditions for many of its businesses – mining, oil and gas and rail. The second-quarter performance was no different as the company suffered a 22% plunge in earnings to $1.09 per share. It remains cautious for the second half of the year and does not expect an upturn in these markets.
Even though commodity prices seem to have stabilized, it still remains at low levels. Further, global uncertainty clouds the outlook given the surprising Brexit outcome and the turmoil in Turkey. Caterpillar now projects revenues in the $40–$40.5 billion range, as against the previous outlook of $40–$42 billion. It also anticipates earnings per share (excluding restructuring costs) of $3.55, down from the earlier projection of $3.70.
Further, at second-quarter end, Caterpillar’s backlog was $11.8 billion, a $1.3 billion decline sequentially and down $3 billion year over year. This does not bode well for the third-quarter performance.
In a recent development, Joy Global will be acquired by the Japanese mining and construction equipment maker and seller – Komatsu Ltd. Komatsu will continue to offer its unrivaled Dantotsu products, services and solutions to its customers. In addition, the Joy Global buyout will add underground mining and super large-sized loading equipment for surface mining to Komatsu’s existing portfolio. The combined company could, thus, pose a stiff challenge to Caterpillar. Some other players in the same space like Terex Corporation (TEX - Free Report) and Parker-Hannifin Corporation (PH - Free Report) will also be affected by this development.
In the wake of choppy end markets, Caterpillar’s goal is to reduce costs, such that the decline in operating profit is no more than 25–30% of the decline in sales and revenues. The company has boosted its restructuring actions and has effectively reduced $1.1 billion in costs year to date and plans a target of over $2 billion for 2016.
Another ray of hope for the company is that construction-related activity is picking up. The Architecture Billings Index, which is considered a leading indicator of U.S. non-residential construction, has remained above 50 in recent months, signaling robust conditions ahead for the construction industry. Improvement in the construction sector will help to partially offset the impact of the soft mining sector.
Caterpillar repurchased approximately $2 billion of its common stock during 2015. No repurchases were made in the first half of 2016. The company ended the quarter with cash and short-term investments of $6.8 billion, while its debt-to-capital ratio at ME&T was 39%, within its targeted range of 30–45%. Further share repurchases will be accretive to earnings.
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Will Restructuring Reverse Caterpillar's (CAT) Dismal Trend?
On Aug 12, 2016, we issued an updated research report on Caterpillar Inc. (CAT - Free Report) – the mining and equipment behemoth. We believe cost-cutting measures and improvement in construction will bail out the company that is going through a rough patch, grappling with weak mining and post-Brexit uncertainty.
Caterpillar’s recent results continue to mirror tough market conditions for many of its businesses – mining, oil and gas and rail. The second-quarter performance was no different as the company suffered a 22% plunge in earnings to $1.09 per share. It remains cautious for the second half of the year and does not expect an upturn in these markets.
Even though commodity prices seem to have stabilized, it still remains at low levels. Further, global uncertainty clouds the outlook given the surprising Brexit outcome and the turmoil in Turkey. Caterpillar now projects revenues in the $40–$40.5 billion range, as against the previous outlook of $40–$42 billion. It also anticipates earnings per share (excluding restructuring costs) of $3.55, down from the earlier projection of $3.70.
Further, at second-quarter end, Caterpillar’s backlog was $11.8 billion, a $1.3 billion decline sequentially and down $3 billion year over year. This does not bode well for the third-quarter performance.
In a recent development, Joy Global will be acquired by the Japanese mining and construction equipment maker and seller – Komatsu Ltd. Komatsu will continue to offer its unrivaled Dantotsu products, services and solutions to its customers. In addition, the Joy Global buyout will add underground mining and super large-sized loading equipment for surface mining to Komatsu’s existing portfolio. The combined company could, thus, pose a stiff challenge to Caterpillar. Some other players in the same space like Terex Corporation (TEX - Free Report) and Parker-Hannifin Corporation (PH - Free Report) will also be affected by this development.
In the wake of choppy end markets, Caterpillar’s goal is to reduce costs, such that the decline in operating profit is no more than 25–30% of the decline in sales and revenues. The company has boosted its restructuring actions and has effectively reduced $1.1 billion in costs year to date and plans a target of over $2 billion for 2016.
Another ray of hope for the company is that construction-related activity is picking up. The Architecture Billings Index, which is considered a leading indicator of U.S. non-residential construction, has remained above 50 in recent months, signaling robust conditions ahead for the construction industry. Improvement in the construction sector will help to partially offset the impact of the soft mining sector.
Caterpillar repurchased approximately $2 billion of its common stock during 2015. No repurchases were made in the first half of 2016. The company ended the quarter with cash and short-term investments of $6.8 billion, while its debt-to-capital ratio at ME&T was 39%, within its targeted range of 30–45%. Further share repurchases will be accretive to earnings.
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