Questions Remain For Caterpillar, JPMorgan Says

JP Morgan’s Ann Duignan maintained a Neutral rating for Caterpillar Inc. CAT, with a price target of $60, after the company preannounced its 1Q revenue sand EPS.

Caterpillar announced that its 1Q results will reflect the seasonal weakness witnessed historically. The company expects to post 1Q16 revenues of $9.3-9.4 billion and EPS ex-restructuring of $0.65-$0.70.

Questions Regarding Caterpillar’s 2016 Performance

“Although the company maintained its 2016 revenue and EPS guidance of $42B (at the midpoint) and $4.00 (ex- restructuring), we are increasingly concerned that the 2016 outlook may not be adequately conservative,” analyst Ann Duignan wrote.

The analyst believes that the guidance has been maintained keeping in mind normal seasonality, rather than end-market demand. Based on 10-year and 20-year averages, normal seasonality suggests that H1 and H2 have been split in the ratio of 49 percent and 51 percent, with a weak 3Q and higher 4Q.

“This suggests that FY’16 revenue would come in at $39B-$40B vs. guidance of $42B; the question remains whether this revised guide is adequately conservative or if H2 remains a stretch,” Duignan pointed out. Caterpillar’s under-producing retail sales implying stronger volumes in 2H and 2017.

The EPS estimates for 1Q16 and FY16 have been reduced from $0.82 to $0.65 and from $3.75 to $3.72, respectively.