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Caterpillar (CAT) Tops Q1 Earnings & Revenues, Raises View

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Caterpillar Inc. (CAT - Free Report) has begun 2017 on a positive note, delivering year-over-year improvement in both the first quarter 2017 top line and bottom line for the first time in 10 quarters. First-quarter 2017 adjusted earnings came in at $1.28 per share that handily beat the Zacks Consensus Estimate of 62 cents and also doubled from prior-year quarter’s earnings of 64 cents.

The better-than-expected results came on the back of the company’s incessant efforts to cut down costs to counter the impact of low-end user demand across many of its businesses. Additionally, the company’s shares advanced 6.52% in pre-market trading, following the release.

Including one-time items such as restructuring costs, Caterpillar reported earnings per share of 32 cents in the quarter, down 3.8% from 46 cents in the prior-year quarter.
 



Revenues

Revenues improved 3.8% year over year to $9.8 billion in the quarter, surpassing the Zacks Consensus Estimate of $9.36 billion. Favorable price realization and higher sales volume, with the most significant increase in Resource Industries mostly owing to higher end-user demand for aftermarket parts led to the improvement.
 
Caterpillar witnessed a 14% rise in sales in Latin America primarily due to stabilizing economic conditions in several countries in the region that helped pick up end-user demand. Revenues increased 12% in Asia Pacific driven by increase in construction equipment sales in China resulting from increased infrastructure and residential investment. Further, higher commodity prices and increased mining production favorably impacted demand for aftermarket parts in Australia. Sales in EAME inched up 2%.

In North America, sales were flat as by lower end-user demand for new equipment and the negative impact of changes in dealer inventories resulting from increased inventories in first-quarter 2016 than in the first-quarter 2017 offset higher demand for aftermarket parts. Increased demand for oil and gas applications were also negated by lower sales for infrastructure construction equipment.

Costs & Operating Profit

In the quarter, cost of sales dipped 0.9% year over year to $6.758 billion. Gross profit rose 16% to $3.1 billion. Selling, general and administrative (SG&A) expenses decreased 4% to $1.05 billion. Research and development (R&D) expenses declined 18% year over year to $418 million.

Adjusted operating profit improved 53% year over year to $1.6 billion owing to higher sales volume. Lower period costs, improved variable manufacturing costs and favorable price realization also aided the increase. About half of the variable manufacturing cost improvement was from lower material costs, and price realization was favorable in Construction Industries.

Caterpillar, Inc. Price, Consensus and EPS Surprise
 

Caterpillar, Inc. Price, Consensus and EPS Surprise | Caterpillar, Inc. Quote

Segment Results

Machinery and Energy & Transportation (ME&T) sales increased 4% year over year to $9.1 billion. Sales of Energy & Transportation inched up 2% due to higher sales of aftermarket parts for reciprocating engines. Sales at Resource Industries improved 15% owing to higher sales volume. Sales improved for both new equipment and aftermarket parts. Construction Industries sales rose 1% due to favorable price realization, partially offset by slightly lower volume.

The ME&T segment reported an operating profit of $302 million, a 23% drop from the year-ago quarter. At the Energy & Transportation segment, operating profit improved 35% due to higher sales volume, a favorable impact from cost absorption and improved material costs. Operating profit advanced 44% at Construction Industries owing to lower period costs and favorable price realization. The Resource Industries returned to profit in the quarter compared with the loss incurred in the prior-year quarter thanks to higher sales volume and lower period costs.

Financial Products’ revenues went up 2% to $760 million primarily due to higher average financing rates in North America, partially offset by lower average earning assets in North America, Latin America and Asia/Pacific and lower average financing rates in Asia/Pacific. Financial Products' profit was $183 million in the quarter up from $168 million in the prior-year quarter owing to a decrease in the provision for credit losses at Cat Financial.

Financial Position

Caterpillar ended the first quarter with cash and short-term investments of $9.47 billion, up from $7.17 billion at 2016 end. Total debt-to-capital ratio was 74% at the first quarter end, flat compared with 2016 end. The debt-to-capital ratio at ME&T was 41.7% as of Mar 31, 2017, higher than 41% as of Dec 31, 2016, but within the company’s target range of 30–45%.

Total cash flow from operating activities in the first quarter was $1.54 billion, compared with $0.5 billion in the prior-year quarter. Operating cash flow at ME&T soared to $1.524 billion in the quarter from $0.219 billion in the prior-year quarter.

Backlog

At the end of first-quarter 2017, Caterpillar’s backlog was at $14.8 billion. On a year-over-year basis, order backlog improved by about $2.7 billion driven by improvement across all segments, particularly in Energy & Transportation and Construction Industries. On a sequential basis, backlog increased $1.7 billion aided by increase in all segments, notable Construction industries.

Guidance

Given the upbeat first-quarter performance, Caterpillar has hiked revenue guidance to the range of $38–$41 billion from the prior range of $36–$39 billion. The company pointed out that there has been a recovery in several of the industries it serves, geopolitical and market uncertainty along with volatility in commodity prices will persist as headwinds for the rest of the year.
 
The company now projects earnings per share of $3.75 per share compared with previous guidance of $2.90 per share. In 2017, restructuring costs will be higher due to ongoing manufacturing facility consolidations and anticipates incurring about $1.25 billion of restructuring costs. This also includes restructuring costs for recently announced actions at manufacturing facilities in Gosselies, Belgium, and Aurora, IL..

In the past one year, the Caterpillar stock has outperformed the Zacks categorized Machinery – Construction/Mining industry. The company has delivered a return of 29.1%, while the industry gained 26.1%.


Zacks Rank & Other Key Picks

Caterpillar currently sports a Zacks Rank #1 (Strong Buy).

Other top-ranked stocks worth considering in the same sector are Donaldson Company, Inc. (DCI - Free Report) , Casella Waste Systems, Inc. (CWST - Free Report) and Parker-Hannifin Corporation (PH - Free Report) . All the three stocks flaunt the same rank as Caterpillar. You can see the complete list of today’s Zacks #1 Rank stocks here.

Donaldson Company has an average positive earnings surprise of 5.93% in the trailing four quarters. Casella Waste generated an outstanding average positive earnings surprise of 165.21% in the past four quarters, while Parker-Hannifin has an average positive earnings surprise of 12.44% in the last four quarters.

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