Time to Hit the Brakes on Caterpillar's Rally -- Ahead of the Tape
24 April 2017 - 8:48PM
Dow Jones News
By Steven Russolillo
Caterpillar Inc.'s stock has climbed out of a deep hole.
Considering the machinery company's earnings, revenue and legal
outlook, shareholders might want to temper their enthusiasm.
Shares surged 36% last year, making it the best performer in the
Dow Jones Industrial Average. They have tacked on another 4% in
2017 to date on hopes that President Donald Trump will increase
infrastructure spending. The gains come even as Caterpillar has
been stung by big bets on resources, agriculture and construction
markets, which were hurt by the global commodities slump and
mining-sector slowdown.
Analysts, who have repeatedly cut earnings forecasts, expect
revenue to drop in 2017 for a fifth consecutive year. And not only
does Caterpillar face top- and bottom-line weakness, but it is now
grappling with a federal criminal investigation, which should be
top of mind for investors in Tuesday's earnings report.
Before that, though, the headline numbers aren't expected to be
anything to celebrate, either. Analysts polled by FactSet estimate
first-quarter earnings of 63 cents a share, down four cents from a
year earlier. For the full year, analysts expect earnings of $3.25
a share. Two years ago, the forecast for the same period was
$5.45.
Revenue is expected to have decreased 2.1% to $9.3 billion.
Caterpillar has missed analysts' sales forecasts in six of the past
seven quarters.
What could sway the stock more in the near term is any
additional information related to the criminal investigation.
Federal agents raided three of Caterpillar's facilities in Illinois
last month, with questions swirling about the company's offshore
tax strategy involving a Swiss subsidiary and its export filings
with the Commerce Department. The company hasn't offered many
details of the financial implications. It has been contesting the
roughly $2 billion in taxes and penalties sought by the Internal
Revenue Service.
Granted, the news isn't all bad; Caterpillar on Monday said its
world-wide machine retail sales rose 1% year over year during the
three-month stretch ended in March, the first increase since
November 2012. That suggests that the worst of Caterpillar's deep
slump in recent years might be over, raising hope that its mining,
construction and energy markets might finally be poised for a
rebound.
But, as with other cyclical companies, the time to buy those
stocks usually isn't when results turn positive but when they are
bottoming. That might have been the case with Caterpillar, too.
The stock's sharp rally since the beginning of 2016 has now made
it fairly expensive. In February, its debt-adjusted market value
hit a high of 2.4 times forward sales projections, its highest at
least since 1994, according to FactSet. It currently sits above 2
times, which has been the case only 5% of the time over that
period.
Caterpillar's stock is riding a banner-year performance. Don't
expect a repeat in 2017.
(END) Dow Jones Newswires
April 24, 2017 14:33 ET (18:33 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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