Caterpillar Earnings Preview: Sales May Shrink, But There Is A Silver Lining

Caterpillar (NYSE: CAT) will report its Q1’17 earnings on April 25, and we expect a low single-digit decline in its sales due to weakness in the mining and construction industries. While commodity prices have rallied of late, which could signal a revival in the mining space, we expect that dealers will wait a few months to see if the prices continue to increase before stocking up inventories. The construction industry also received positive signals from China and the U.S., but the economic uncertainty in Europe continued in the first quarter, which may continue to weigh on Caterpillar’s sales. Nevertheless, we expect the company’s profits to remain flat this quarter due to restructuring efforts and other cost-cutting measures.

Commodity Prices Rising May Not Be Enough To Boost Dealer Confidence

Caterpillar’s Energy, Transportation and Resource industry sales generally mimic the trends in crude oil and commodity prices. Crude oil prices were nearly flat in the first two months of 2017 and declined marginally in March. Meanwhile, global commodity prices for energy, nonprecious metals and minerals have increased in the last few quarters, possibly hinting at early signs of recovery in the mining sector. Although there was a sequential decline in energy commodities in Mar’17 over Feb’17, the year over year growth was more than 30% throughout the quarter. Nonprecious metals and minerals commodities also grew over 15%. This is the second consecutive quarter of growth in commodity prices after almost two years of declines. However, prices are still 30-40% lower than those in 2014, which is why we believe that mining equipment dealers may still be cautious about increasing their inventories. Caterpillar’s management previously stated that sales of its equipment parts increased in Q4 as customers are still reluctant to replace their used equipment despite increasing commodity prices. Thus, we expect Caterpillar’s Energy, Transportation and resource industry sales to remain about flat this quarter.

Construction Industry Decline To Continue            

Caterpillar’s construction industry sales declined more than 20% in 2016 due to lower used equipment prices, weakness in commodity prices and several local and global economic concerns such as Brexit and the slowdown of the Chinese economy. The U.S. construction industry grew between 2-3% in the first quarter of 2017, and the real estate markets in China also increased during the first quarter of 2017 due to increasing commodity prices. However, Europe continues to remain a concern for Caterpillar, as several construction projects have halted due to a lack of funds from the EU. Used inventory is also readily available, which will also dampen the demand for construction equipment. Thus, we expect a low single digit decline in Caterpillar’s construction industry sales for this quarter.

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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