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BMO Cuts Caterpillar EPS Estimate 32%

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BMO Capital Markets cut its first quarter EPS estimate of Caterpillar Inc. (NYSE: CAT) by 32 percent saying that the benefits to EPS seem a little outsized in 2015—adding up to $2.28—and will be more difficult to repeat in 2016 and beyond.

Analyst Joel Tiss trimmed his first quarter EPS estimate to $0.70 from $1.03 after the company's guidance for the January to March period came in below the Street view. The company sees earnings of 65 to 70 cents for the first quarter. Street analysts, on average, currently expect earnings of 75 cents a share.

Caterpillar expects first quarter revenue of $9.3 billion – $9.4 billion. The current consensus estimate stands at $9.92 billion.

The analyst, however, raised his 2016 EPS view by 5 cents to $3.65 stating that "we recognize the potential for the company to use various levers to move EPS as close as possible to its $4.00 guidance."

What Those Levers Are

One lever, for instance, is the ability to aggressively repurchase shares given that $5.5 billion remains of its $10 billion repurchase authorization. According to Tiss, share repurchases ($2 billion worth added about $0.15 to 2015 results), and lower tax rates (+$0.13), and reduction in incentive compensation, which added $715 million (about $1.23 of EPS), are on the table.

Others include $0.47 of gains from currency changes (not in control of the company but nonetheless likely nonrecurring) and the sale of its remaining stake in a logistics business (+$0.20). Some smaller benefits came from a $30 million gain on the sale of securities (+$0.05), and a decrease in credit provisions (+$0.05).

What To Expect In 2016

For 2016, the analyst said the upside from aggressive cost-saving actions are expected to approximate $400 million in 2016, and will have some lasting benefits to profitability. The cost-saving actions amounted to $908 million in 2015 versus $441 million in 2014.

However, he is concerned that "these are some of the factors that keep us nervous about the company's ability to show flat-to-improving results in 2016, and with the recent clarification that 1Q16 EPS will be well below expectations, the implied improvement needed to reach full-year EPS of $4.00 will likely require a substantial number of the same types of levers that were used in 2015."

Street's consensus estimate calls for earnings of $3.66 a share for 2016.

What About 2017?

The analyst has warned that 2017 will be another down year and remain concerned that as Caterpillar runs out of various levers to pull, the ability to show EPS resiliency will diminish.

"We stop short of reaching the $4.00 level this year because we are worried about the company's ability to continue finding creative ways to reach guidance. The core business is probably running closer to $2.50 of EPS, which likely will not matter much to investors when end markets begin to flatten and turn more positive—hopefully later in 2017 or into 2018," Tiss noted.

Shares of Caterpillar were down 0.24 percent at $75.71 on Tuesday.

Latest Ratings for CAT

DateFirmActionFromTo
Apr 2019DowngradesBuyHold
Feb 2019DowngradesBuySell
Dec 2018UpgradesNeutralBuy

View More Analyst Ratings for CAT
View the Latest Analyst Ratings

Posted-In: Analyst Color Earnings News Guidance Analyst Ratings

 

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