Caterpillar’s Earnings Preview: Earnings To Suffer Due to Mining And Crude Oil Weakness

Caterpillar (NYSE:CAT) is set to announce its first quarter results on Thursday, April 23. The company is coming off a poor fourth quarter in which revenue declined 1% year-on-year to $14.2 billion due to currency headwinds, primarily the Euro and Japanese yen. ^[1] Sales volume was relatively stagnant, as declines in Caterpillar’s Resource and Construction Industries segments were offset by the Energy and Transportation segment. After growing in the first three quarters of 2014, Caterpillar’s profits took a dive in the fourth quarter. Profits declined 25%, largely as a result of costs associated with the introduction of new products and higher incentive expenses associated with sales. Caterpillar’s earnings per share declined 20%, to $1.23. Excluding restructuring costs, earnings per share came in at around $1.35, around $0.20 lower than analyst expectations.

In the first quarter, we expect to see a decline in Caterpillar’s revenue driven by continued weakness in the Resource and Construction Industries segments. The strong U.S. dollar is also likely to have an impact on the company’s revenues. Sales of its Energy and Transportation segment’s locomotives will likely have slowed down as U.S. railroads move to new emission standard compliant locomotives.

It is because of these trends that the company had earlier announced expectations of poor revenue and earnings for the year. Caterpillar expects its 2015 revenue to decline by around 9% year-on-year, to $50 billion, and earnings per share to fall by 25%, to $4.75 (excluding restructuring costs). ^[1]

See our complete analysis of CAT here

Declines In Construction Equipment Sales To Present Headwinds

According to Caterpillar’s latest retail sales statistics, its Construction Industries retail sales have continued to fall, with the declines becoming heavier in the past few months. Retail sales declined 11% in the three months ended February, compared to 10% in the three months ended January, and 9% in the three months ended December. ^[2] The weak Brazilian economy and tough year-on-year comparison with Latin American markets have taken a toll on Caterpillar’s Construction Industries segment. The declining crude oil prices have also had an impact on the segment’s revenues as rig counts have fallen over the past year, leading to lower demand for construction equipment to build wells and other infrastructure for oil and gas drilling. This should have had an impact Caterpillar’s first quarter top line.

Revenue To Be Pressured Due To Global Mining Weakness

Caterpillar has been struggling due to weak demand for machinery and equipment in the global mining sector since the fourth quarter of 2012. Caterpillar‘s revenue from its Resource Industries segment, which primarily comprises of sales of mining equipment and machinery, has been falling due to a decline in capital expenditure at mining companies. Declining prices of mined commodities such as coal and iron ore, driven by high production and slowing demand from China, have discouraged mining companies from investing in new mines or expanding operations. In 2014, the segment’s revenue declined 33% year-on-year. ^[3]

We anticipate this weakness from the global mining sector to have persisted through the first quarter of 2015. Retail statistics released by Caterpillar for the three month rolling period ended February 2015, shows that mining equipment sales declined 12%. ^[2]

Caterpillar’s Locomotive Sales May Decline

U.S. railroads have been looking for new locomotives or retrofit kits for existing locomotives that would help them remain compliant with the latest emissions standards, which came into effect from January 2015. This would have been a great growth opportunity for Caterpillar’s Energy and Transportation segment, which also manufactures locomotives, if it would have been able to offer the railroad industry with the required locomotives.

Caterpillar had announced that it will not have emissions-compliant locomotives ready for production anytime before 2017. It anticipates its demonstration models to be available later in the year. By the time CAT will be able to deliver production ready units, General Electric (NYSE:GE) will already have captured a large chunk of the market. GE has already begun testing its locomotives for compliance with the latest emission standards and should be able to provide emissions-compliant locomotives this year. This loss of market share could be a significant blow for CAT, 70% of whose locomotive revenues are generated through sales to the U.S. railroad industry.

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1. Caterpillar’s 4Q 2014 Earnings Release, January 27, 2015, www.caterpillar.com [↩] [↩]
2. Caterpillar’s Retail Sales Statistics, www.caterpillar.com [↩] [↩]
3. Caterpillar’s 2014 10K SEC Filing, February 18, 2014, www.caterpillar.com [↩]