Shares of Caterpillar (CAT – Free Caterpillar Stock Report) are down modestly in early trading after the heavy equipment manufacturer reported mixed fourth-quarter financial results. Sales of $9.57 billion came in below our estimate of $9.90 billion and the year-earlier figure of $11.0 billion, as weak conditions in certain end markets cast a large shadow over operations. But the company did a better-than-expected job of aligning its cost structure with current demand trends. In the process, share earnings of $0.83 beat the Wall Street consensus and our expectations of $0.64, as well as the $0.74 reported in the prior-year period. For 2016, Caterpillar reported share earnings of $3.44 on sales of $38.5 billion.
Earlier data suggested that the worst of the secular decline was in the rear-view mirror. A 17% fall in machine sales during November was followed by a 12% decline in December. Similarly, the same metric moderated by 10% in the rolling three-month period through December, compared to 17% through November. Looking at geographical markets, Caterpillar's North America business remains in an unenviable stage, but the 14% jump in machine sales during December was an improvement on a sequential basis. More good news came from the manufacturers' operations in the Asia/Pacific region, where sales surged 19%, which followed the 11% gain in the previous month.
While the company sees positive signs in various end markets, the overall economic environment remains somewhat challenged. Commodity prices have regained some ground, which resulted in higher quoting and order activity for the fourth quarter. This indicates that mining-related sales (the company's bread-and-butter business) have bottomed. These developments augur well for the CAT Resource Industries unit. Still, management expects miners' capital spending to be flat in 2017, after several years of cuts. The Construction Industries segment is looking forward to better days, as China and Brazil are recovering, and Europe has stabilized a tad. Still, the ample supply of used equipment, which weighed on results last year, is likely to linger into 2017. Business from countries that rely on oil revenues to drive economic growth will probably remain tepid at best. The Energy & Transportation division highlighted solid demand for turbines made for gas compression. Also, higher oil prices portend well for Caterpillar's line of drilling and servicing offerings. Unfortunately for this venerable company, rail lines remain saddled with low traffic volume, while both power generation and shipbuilding operations appear set to be laggards in the coming quarters.
Plans by President Donald J. Trump to spend significant amounts of capital on infrastructure projects have buoyed the equities of industrial companies. This, together with prospects for tax reform, bears watching. Moreover, a surge in CAT stock towards the tail end of 2016 helped it become the best performer among the Dow Jones Industrial Average.
Due to the strengthening of the U.S. dollar in recent months, which hurts repatriated earnings, management has lowered revenue expectations for 2017 from $38 billion to a range of $36 billion to $39 billion. Excluding about $500 million in estimated restructuring costs, CAT is looking for share net of $2.90. We feel that management is being cautious. Instead, we are maintaining our 2017 top- and bottom-line figures of $38.0 billion and $3.25, respectively.
About The Company: Caterpillar Incorporated is the world’s largest producer of earthmoving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks. Foreign sales account for about 47% of the company’s total.
