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Caterpillar (CAT) Q3 Earnings Top, Stock Down on View Cut
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Caterpillar Inc.’s (CAT - Free Report) third-quarter 2016 adjusted earnings of 85 cents per share beat the Zacks Consensus Estimate of 75 cents but plunged 19% from the prior-year quarter. The results continue to reflect low-end user demand across many of the company’s businesses due to economic weakness throughout the world. The company’s shares fell 1.97% in pre-market trading, following the release.
Including restructuring costs, Caterpillar’s earnings of 48 cents per share were 49% lower than the prior-year quarter figure of 94 cents per share.
Revenues
Revenues plummeted 16% year over year to $9.16 billion in the quarter, falling short of the Zacks Consensus Estimate of $9.80 billion due to lower sales volume resulting from consistent weak commodity prices globally and economic weakness in developing countries. Sales declined for both new equipment and aftermarket parts, with major decline noted in the former.
Caterpillar witnessed a revenue decline across all regions. Latin America was the worst, registering a 22% plunge in sales, primarily attributable to lower end-user demand as a result of widespread economic weakness. In North America, Caterpillar witnessed a 20% decline in sales due to lower end-user demand for infrastructure, continued weakness in mining and the impact of low oil prices. Sales in Europe, Africa and Middle East (EAME) tumbled 20% due to the weak oil and commodity price environment as well as an uncertain investment environment. Sales in the Asia-Pacific region slumped 8% due to lower demand for Energy & Transportation applications.
Costs & Operating Profit
In the quarter, cost of sales dropped 17% year over year to $6.527 billion. Gross profit plunged 15% to $2.6 billion. Selling, general and administrative (SG&A) expenses declined 12% to $992 million due to substantial restructuring and cost reduction actions over the past year and lower short-term incentive compensation expense. Research and development (R&D) expenses went down 12% year over year to $453 million.
Operating profit was $481 million, down 48% year over year. Lower sales volume and unfavorable price realization were partially mitigated by favorable period costs and variable manufacturing costs. The unfavorable price realization resulted from competitive market conditions, primarily in Construction Industries.
Segment Results
Machinery and Energy & Transportation (ME&T) sales decreased 18% year over year to $8.5 billion. Sales of Energy & Transportation plunged 19% due to lower end-user demand for all applications. Sales at Resource Industries dropped 25% owing to lower end-user demand across all regions. Construction Industries sales dropped 13% owing to lower volumes and unfavorable price realization.
The ME&T segment reported an operating profit of $366 million, plummeting 54% from $802 million reported in the year-ago quarter. At the Energy & Transportation segment, operating profit dropped 16% as a result of lower sales volume partially countered by lower material costs.
Operating profit tumbled 8% at Construction Industries owing to lower volume and unfavorable price realization. The worst performance was witnessed at Resource Industries, with the segment incurring a loss of $77 million in the quarter compared with a loss of $42 million a year ago due to lower sales volume and unfavorable price realization.
Financial Products’ revenues slipped 0.4% to $749 million as unfavorable impacts from returned or repossessed equipment, mainly in North America and lower average earning assets in Latin America and Asia/Pacific were neutralized by higher average financing rates particularly in North America. Financial Products' profit was $183 million in the quarter, compared with $207 million in the prior-year quarter.
Financial Position
Caterpillar ended the third quarter with cash and short-term investments of $6.11 billion, down from $6.5 billion at 2015 end. Total debt-to-capital ratio was 70% at the third quarter end, down from 72% at 2015 end. The debt-to-capital ratio at ME&T was 37.0% as of Sept 30, 2016 within the company’s target range of 30–45%.
Total cash flow from operating activities in the first nine months of 2016 was $3.96 billion, compared with $4.86 billion in the prior-year comparable period. Operating cash flow at ME&T declined to $400 million in the quarter from $766 billion in the prior-year quarter. Caterpillar anticipates ME&T operating cash flow to exceed dividends and capital expenditures in 2016.
Backlog
At the end of the third quarter, Caterpillar’s backlog was at $11.6 billion. On a year-over-year basis, order backlog declined by about $2.1 billion, having recorded decreases in all segments. On a sequential basis, backlog declined $150 million.
Given the challenging environment, Caterpillar now estimates revenues around $39 billion, as against the previous outlook of $40–$40.5 billion. Further, Caterpillar now expects earnings per share (excluding restructuring costs) of $3.25, down from the earlier projection of $3.55. Restructuring costs are now projected at $800 million in 2016, higher than the prior stated $700 million, due to asset write downs recognized in the third quarter.
The company remains cautious regarding 2017 and stated that sales and revenues will not be significantly different than 2016. However, given that most commodity prices have improved from the lows earlier in 2016 and assuming they remain stable and move higher in 2017, second half results will improve. Caterpillar apprehends that world economic growth will remain subdued at close to 2.5%, similar to the past few years. The company will continue with its aggressive restructuring, focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.
Zacks Rank
Caterpillar currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the same sector are Worthington Industries, Inc. (WOR - Free Report) , Harsco Corp. and Codexis, Inc. (CDXS - Free Report) . Worthington Industries delivered an average positive earnings surprise of 20.13% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Harsco also sports a Zacks Rank #1 and has delivered an average positive earnings surprise of 89.75% in the past four quarters. Codexis, another Zacks Rank #1, stock has an average positive earnings surprise of 102.88% in the past four quarters.
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Caterpillar (CAT) Q3 Earnings Top, Stock Down on View Cut
Caterpillar Inc.’s (CAT - Free Report) third-quarter 2016 adjusted earnings of 85 cents per share beat the Zacks Consensus Estimate of 75 cents but plunged 19% from the prior-year quarter. The results continue to reflect low-end user demand across many of the company’s businesses due to economic weakness throughout the world. The company’s shares fell 1.97% in pre-market trading, following the release.
Including restructuring costs, Caterpillar’s earnings of 48 cents per share were 49% lower than the prior-year quarter figure of 94 cents per share.
Revenues
Revenues plummeted 16% year over year to $9.16 billion in the quarter, falling short of the Zacks Consensus Estimate of $9.80 billion due to lower sales volume resulting from consistent weak commodity prices globally and economic weakness in developing countries. Sales declined for both new equipment and aftermarket parts, with major decline noted in the former.
Caterpillar witnessed a revenue decline across all regions. Latin America was the worst, registering a 22% plunge in sales, primarily attributable to lower end-user demand as a result of widespread economic weakness. In North America, Caterpillar witnessed a 20% decline in sales due to lower end-user demand for infrastructure, continued weakness in mining and the impact of low oil prices. Sales in Europe, Africa and Middle East (EAME) tumbled 20% due to the weak oil and commodity price environment as well as an uncertain investment environment. Sales in the Asia-Pacific region slumped 8% due to lower demand for Energy & Transportation applications.
Costs & Operating Profit
In the quarter, cost of sales dropped 17% year over year to $6.527 billion. Gross profit plunged 15% to $2.6 billion. Selling, general and administrative (SG&A) expenses declined 12% to $992 million due to substantial restructuring and cost reduction actions over the past year and lower short-term incentive compensation expense. Research and development (R&D) expenses went down 12% year over year to $453 million.
Operating profit was $481 million, down 48% year over year. Lower sales volume and unfavorable price realization were partially mitigated by favorable period costs and variable manufacturing costs. The unfavorable price realization resulted from competitive market conditions, primarily in Construction Industries.
Segment Results
Machinery and Energy & Transportation (ME&T) sales decreased 18% year over year to $8.5 billion. Sales of Energy & Transportation plunged 19% due to lower end-user demand for all applications. Sales at Resource Industries dropped 25% owing to lower end-user demand across all regions. Construction Industries sales dropped 13% owing to lower volumes and unfavorable price realization.
The ME&T segment reported an operating profit of $366 million, plummeting 54% from $802 million reported in the year-ago quarter. At the Energy & Transportation segment, operating profit dropped 16% as a result of lower sales volume partially countered by lower material costs.
Operating profit tumbled 8% at Construction Industries owing to lower volume and unfavorable price realization. The worst performance was witnessed at Resource Industries, with the segment incurring a loss of $77 million in the quarter compared with a loss of $42 million a year ago due to lower sales volume and unfavorable price realization.
Financial Products’ revenues slipped 0.4% to $749 million as unfavorable impacts from returned or repossessed equipment, mainly in North America and lower average earning assets in Latin America and Asia/Pacific were neutralized by higher average financing rates particularly in North America. Financial Products' profit was $183 million in the quarter, compared with $207 million in the prior-year quarter.
Financial Position
Caterpillar ended the third quarter with cash and short-term investments of $6.11 billion, down from $6.5 billion at 2015 end. Total debt-to-capital ratio was 70% at the third quarter end, down from 72% at 2015 end. The debt-to-capital ratio at ME&T was 37.0% as of Sept 30, 2016 within the company’s target range of 30–45%.
Total cash flow from operating activities in the first nine months of 2016 was $3.96 billion, compared with $4.86 billion in the prior-year comparable period. Operating cash flow at ME&T declined to $400 million in the quarter from $766 billion in the prior-year quarter. Caterpillar anticipates ME&T operating cash flow to exceed dividends and capital expenditures in 2016.
Backlog
At the end of the third quarter, Caterpillar’s backlog was at $11.6 billion. On a year-over-year basis, order backlog declined by about $2.1 billion, having recorded decreases in all segments. On a sequential basis, backlog declined $150 million.
CATERPILLAR INC Price, Consensus and EPS Surprise
CATERPILLAR INC Price, Consensus and EPS Surprise | CATERPILLAR INC Quote
Guidance
Given the challenging environment, Caterpillar now estimates revenues around $39 billion, as against the previous outlook of $40–$40.5 billion. Further, Caterpillar now expects earnings per share (excluding restructuring costs) of $3.25, down from the earlier projection of $3.55. Restructuring costs are now projected at $800 million in 2016, higher than the prior stated $700 million, due to asset write downs recognized in the third quarter.
The company remains cautious regarding 2017 and stated that sales and revenues will not be significantly different than 2016. However, given that most commodity prices have improved from the lows earlier in 2016 and assuming they remain stable and move higher in 2017, second half results will improve. Caterpillar apprehends that world economic growth will remain subdued at close to 2.5%, similar to the past few years. The company will continue with its aggressive restructuring, focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and job sites along with developing the next generation of more productive and efficient products.
Zacks Rank
Caterpillar currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the same sector are Worthington Industries, Inc. (WOR - Free Report) , Harsco Corp. and Codexis, Inc. (CDXS - Free Report) . Worthington Industries delivered an average positive earnings surprise of 20.13% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Harsco also sports a Zacks Rank #1 and has delivered an average positive earnings surprise of 89.75% in the past four quarters. Codexis, another Zacks Rank #1, stock has an average positive earnings surprise of 102.88% in the past four quarters.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>