Why Investors Shouldn't Rejoice Over Caterpillar Inc.'s Earnings

It was a tough 2013, to say the least, for earth-moving-equipment maker Caterpillar (NYSE: CAT  ) , which turned in one of the worst performances of the Dow Jones Industrial Average components. Understandably, investors who tuned in to the company's fourth-quarter and full-year report anxiously awaited any positive news they could get their hands on.

Expectations were low, meaning that Caterpillar had a relatively low bar to cross. While there are signs of progress, Caterpillar is still struggling in some of its key segments. Here are a few key items from Caterpillar's latest round of earnings for investors to focus on.

Cost cuts drive fourth-quarter-profit growth
Caterpillar's fourth-quarter earnings followed a familiar theme this earnings season, which is to produce profit growth through cost cuts and not sales growth. In all, Caterpillar's sales fell 10% in the fourth quarter and 16% for the full year. The company attributed its falling sales to reduced sales of its mining equipment.

Sluggish global demand for heavy machinery has hit Deere & Company (NYSE: DE  ) recently as well. Its own net sales dropped 3% in the fourth quarter. However, Deere navigated last year better than Caterpillar, since its worldwide sales increased 5% for the full year.

Caterpillar did manage to produce 48% earnings-per-share growth in the fourth quarter, but that was mostly due to cost cuts and an easy comparison from the prior year's fourth quarter. Caterpillar's fourth quarter 2012 earnings were negatively affected by a $580 million goodwill charge and positively affected by a $300 million tax settlement.

Stripping out these one-time items to focus on the company's core profitability paints a slightly different picture than the headline growth figure suggests. Caterpillar's adjusted earnings increased just 5% in the fourth quarter. For the full year, earnings per share actually declined by 32%.

And yet, shares of Caterpillar jumped on the day it released earnings. Caterpillar stock rose nearly 6% immediately after the opening bell. Optimism was likely fueled by the fact that Caterpillar's results were better than the market suspected, and the company was also aided by a 2014 outlook that wasn't as bad as many analysts feared.

Future outlook gives investors hope
Caterpillar management laid out a forecast for 2014 that looks fairly unimpressive, but the market nevertheless seemed pleased given the stock's performance. Sales are expected to be flat in 2014 versus 2013, plus or minus 5%. Earnings per share should clock in at $5.85 per share excluding some considerable restructuring costs estimated to shave $0.55 per share off earnings. Even without including these costs, Caterpillar's guidance calls for just 1.7% earnings growth in 2014.

In this regard, it's not clear that investors should be too quick to rejoice. Cost cuts aren't a long-term solution, which explains why Caterpillar is forecasting another difficult year ahead. Cutting expenses can only go so far and is a short-term fix. Investors should be concerned about the company's fairly steep revenue drop in the last year, as it's clear the downturn in global mining activity is taking a toll.

Whether that reverses over the next few quarters is far from a guarantee. Precious metals prices remain low, and other equipment makers that focus on the mining industry don't have many good things to say. Mining equipment giant Joy Global, (NYSE: JOY  ) reported its bookings fell 19% in its fourth quarter. Metrics deteriorated across the board in Joy Global's fourth quarter: sales fell 26%, and adjusted earnings per share collapsed by nearly half versus the same quarter the previous year.

The Foolish takeaway
It seems as though Caterpillar is being rewarded for an earnings report that was not outright awful. There's considerable weakness in Caterpillar's mining segment which is not expected to subside in the near term. On a positive note, Caterpillar is able to keep earnings afloat with aggressive cost cuts. And, the company announced a new $10 billion share buyback plan through 2018, which will further boost profits.

Investors should be careful not to get too carried away with Caterpillar's latest results. The market may be setting itself up for disappointment, given Caterpillar's persisting struggles.

It's no secret that investors tend to be impatient with the market...
...but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2815861, ~/Articles/ArticleHandler.aspx, 9/2/2015 7:50:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:01 PM
CAT $76.10 Up +1.20 +1.60%
Caterpillar, Inc. CAPS Rating: ***
DE $80.78 Up +0.78 +0.98%
Deere & Company CAPS Rating: ****
JOY $22.13 Up +0.03 +0.14%
Joy Global, Inc. CAPS Rating: ****