Caterpillar's Margins Should Be Quite Good ... Whenever Revenues Decide To Come Back

Barclays' U.S. machinery analyst Robert Wertheimer noted that revenues declined in all segments, with the drop at 18 percent. However, operating margins rose in construction and E&T — although down modestly in resources. The pattern, according to the analyst, is not typical for machinery companies, specifically when pricing is negative. The analyst feels the disconnect is due to substantial and solid restructuring.

Barclays believes 2017 could go sharply in either direction depending on revenues, with incentive comps and material costs seen as headwinds and flow through of restructuring as tailwinds. The firm sees risk to its 2017 expectations of slightly up earnings per share and slightly down revenues from mix headwind, as high margin after market in oil and gas slides.

While noting that Caterpillar has some of the best franchises in industrials, with strong market shares in high after-market businesses like mining and oil & gas, Barclays said it doesn't thinks either business or end market is structurally broken. Given that more Caterpillar equipment is needed to extract resource, the quality of which is deteriorating every year, the firm believes the company stands to gain from it.

However, the firm believes the recovery is unlikely to be sharp, as there has been an unprecedented overhang from an unprecedented upcycle. The firm also said it feels the time to get back to its normalized earnings per share estimate of $7–$8 or even higher, could be 2020 and that it is less likely to occur before that.

Barclays has an Equal-Weight rating and a $90 price target for the shares of Caterpillar.

At the time of writing, Caterpillar shares were down 0.39 percent at $84.15.