Market Overview

Caterpillar Earnings Preview: Eye On China (CAT)

Heavy equipment maker Caterpillar (NYSE: CAT), which continues to rely heavily on the markets in China, is scheduled to report its third-quarter 2013 results Wednesday, October 23, before the markets open.

About a third of Caterpillar's revenue and approximately half of its profit come from China. Investors will be watching for signs that the company is taking advantage of the slow economic recovery and the ongoing urbanization in the People's Republic in order to offset the effects of the global slowdown in mining activity.

Expectations

Analysts on average predict that Caterpillar will report that its revenue for the quarter declined almost 13 percent year-over-year to $14.32 billion. Earnings of $1.67 per share are also in the consensus forecast. That would be down from a reported profit of $2.54 per share in the comparable period of last year.

Note that the consensus earnings per share (EPS) estimate has slipped in the past 60 days from $1.74. And Caterpillar fell short of consensus EPS estimates in the previous three quarters by more than six percent, following a five-quarter streak of earnings beats.

The second-quarter report highlighted the company's strong cash flow, despite the decline in sales and EPS. Caterpillar also lowered its full-year revenue guidance, though it said the company expected profit to improve in the second half of the year. The share price retreated less than two percent in the days following the second-quarter report.

Looking ahead to the current quarter, the forecast currently calls for sequential and year-over-year earnings growth, though that estimate also has slipped in the past 60 days. And revenue for the quarter is expected to be more than eight percent lower than a year ago. The full-year forecast has EPS down 30 percent and revenue more than 14 percent lower.

The Company

Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide. It also offers retail and wholesale financing for its products, as well as insurance brokerage services.

The company was founded in 1925, and its headquarters are in Peoria, Illinois. Caterpillar is a component of the S&P 500 and the Dow Jones Industrial Average, and it now has a market capitalization of more than $56 billion. Doug Oberhelman has been chief executive officer of the company since July 2010 and chairman of the board since November 2010.

Competitors include Deere & Co. (NYSE: DE) and Joy Global (NYSE: DE). The former topped consensus EPS estimates by about 18 percent in its most recent report, while the latter fell short by more than 24 percent. Both are expect to post declining revenues for the current quarter.

During the three months that ended in September, Caterpillar launched a $1 billion accelerated buyback plan, announced the retirement of three vice presidents and reported weak sales in July and August, especially in Asia. And Jim Chanos made a case for shorting Caterpillar.

See also: Caterpillar Announces $1 Billion Accelerated Stock Repurchase Program

Performance

Caterpillar has a long-term earnings per share growth forecast of about 20 percent and a price-to-earnings (P/E) ratio in line with the industry average. Its operating margin also matches the industry average, and it has a return on equity of almost 24 percent. The dividend yield is near 2.7 percent.

The number of Caterpillar shares sold short, as of the September 30 settlement date, represents less than four percent of the total float. It would take more than four days to close out all of the short positions.

The consensus recommendation of analysts surveyed by Thomson/First Call who follow the stock has been to buy shares for the past three months. None of them recommend selling. The analysts' mean price target, or where they expect the stock to go, is more than five percent higher than the current share price.

Shares have traded mostly between $82 and $88 for the past six months as it struggles to break above the 200-day moving average. The share price is more than six percent lower year-to-date. Yet, over the past six months, Caterpillar has outperformed the competitors mentioned above, though it underperformed the S&P 500.

See also: Top 4 Mid-Cap Stocks In The Farm & Construction Machinery Industry With The Highest ROE

At the time of this writing, the author had no position in the mentioned equities.

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Posted-In: Caterpillar Deere Jim Chanos joy globalEarnings News Previews Trading Ideas Best of Benzinga

 

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