Caterpillar Earnings Preview: Revenue Decline To Continue In Q4’16

Caterpillar (NYSE: CAT) will announce its Q4’16 earnings on January 26th. Caterpillar’s revenues have declined year to year each quarter for the last couple of years and we expect that this trend continued in this quarter as well. Although oil prices recovered in Q4 due to the OPEC deal to limit production, we don’t expect there was much impact on Caterpillar’s fourth quarter sales as it will take time for increased oil pricing to stimulate demand, especially outside oil producing sectors. Caterpillar’s stock price went up after the U.S. presidential election results on hopes of increased government spending on infrastructure projects. Caterpillar’s restructuring efforts have also started to pay off, but we don’t expect them to offset revenue decline for the next few quarters. However, due to the ongoing risks associated with oil & gas, transportation, and construction industry, we believe that the investor exuberance may be unwarranted.

Industrial Sales To Continue Declining Despite Oil Price Surge 

Caterpillar’s Industrial sales—including construction equipment, resource industry and energy—have been declining for the last couple of years due to weakness in oil prices, lower commodity prices and economic uncertainties across its markets. The OPEC deal to cap production has resulted in crude oil price going beyond $50 per barrel for the first time since August 2015.  Still, we don’t expect to see significant improvement in Caterpillar’s industrial sales in Q4’16 as it will take a while for this to reflect in the demand for machinery. Decline in U.S. exports of construction and agriculture equipment in the first half of 2016 is also likely to have continued due to lower used equipment prices, which are not allowing dealers to renew their fleets. The only region where Caterpillar’s sales may go up is Asia Pacific, which has demonstrated reasonable growth despite some economic concerns.

Caterpillar’s Stock Price Rose But Risks Persist

Caterpillar’s stock price rose sharply on expectations of increased infrastructure spending by the U.S. government after the recent presidential election results. The President-elect reiterated his view of increasing U.S. government infrastructure spending in his victory speech. However, we believe that Caterpillar may be overvalued as the market appears to have discounted several risks that continue to exist. Here are the key risks that we see:

• Oil prices remain volatile and are not high enough to drive substantial investment,
• Weakness in North American and Construction equipment industry could continue as market is headed for a slowdown in 2017 due to increasing raw material and labor costs, stiff lending rules of banks and uncertainty around government construction spending,
• Economic growth in Europe and the impact of Brexit on construction businesses remain a concern,
• Sales of North American rail customers remain low.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis of Caterpillar

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