What to Expect From Caterpillar Inc.'s First Quarter?

The year 2013 was exceptionally rough for the world's largest mining and construction equipment maker, Caterpillar (NYSE: CAT  ) , as constricted mining spending impinged upon its sales and took a toll on its earnings. Had it not been for the company's relentless efforts at cutting costs, the outcome would have been far worse. But now there are signs that Cat's business may be stabilizing -- the company will come out with its first-quarter results on April 24.

While the story may not be grossly different from what we saw in the fourth quarter, here's the lowdown on what to expect.


Source: Caterpillar

Top line
Cat primarily operates through three main product segments -- power systems (now energy and transportation, contributed 37.9% to 2013 revenue), resource industries (24.3%), and construction industries (32.3%). The resource industries business has been the main drag; it caters to the machinery requirements of mines and quarries. This segment is likely to remain under pressure in the current quarter, while the other two may show some gains.

As positives and negatives battle each other out, analysts expect first-quarter revenue to be $13.24 billion, slightly more than the $13.21 billion reported last year. Let's peek into the outlook for the individual lines of business.

Power systems: This segment provides reciprocating engines, turbines and related parts to industrial, petroleum, rail-related businesses, among others. Cat expects yearly sales gains to be around 5%. But there is some caution in the air as aluminum major Alcoa has forecast an 8%-12% decline in the global demand for industrial gas turbines. And it is showing in Cat's numbers -- retail stats exhibit a 10% decline in sales to the oil and gas sector in January and February.

Resources industries: Mining companies have been restricting capital expenditure due to weak metal prices and cash flow; in turn, the sale of mining equipment, especially high-margin heavy machinery, has gone down. In 2013, every region registered low sales, but it was most pronounced in Asia Pacific.

In 2014, too, the scenario will remain subdued as mining companies are expected to reduce spending by 10%, according to Bloomberg analysis. This will have a bearing on Cat's revenue from this segment, but it may not be as bad as the last time. In the past quarter, sales in the segment went down by a steep 48%.

The company's own forecast for the whole year is a 10% decline in the segment's sales. Cat's February retail data shows sales to be down 37%, the sharpest fall again being in the Asia Pacific region (55%). So, the writing is on the wall for this business.

Construction industries: Machinery in this segment supports infrastructure and building construction and is the brightest spot for Cat, as the sector is buoyed by the recovery in the U.S. and strong support from China.

Cat's excavators are drawing good demand in China, so much so that revenue from the country in 2013 went up 20%, compared with 2012, to touch $3.5 billion. Construction machinery sales in the country are up by double-digit amounts in the last couple of months, according to Bloomberg. Back home, The American Institute of Architects' Architecture Billings Index, or ABI, has been improving since last year and stands at 50.7 for February. The ABI is a good indicator of construction activity in the coming nine to 12 months, and a score higher than 50 indicates increased billing.

There has even been news of shelved projects being restarted. Alcoa projects that commercial building and construction in North America will go up by 3%-4%, and China's by 7%-9% in the year.

Cat is already witnessing the result of this uptick. In the past quarter, its profit jumped 44% on the back of a 20% increase in construction equipment sales. For the year, the company's looking at a 5% improvement. So, in this quarter, we can expect the segment to register good numbers.


Source: Caterpillar

Bottom line
Analysts expect the quarter's earnings to be $1.24 per share, down from $1.31 in the first quarter of 2013. 

Caterpillar has lowered inventory by $2.9 billion, and its dealers by more than $3 billion in 2013. Clearly, in 2014, the pressure on sales from the inventory side will be lower. Moreover, the company has undertaken several cost-cutting measures such as closing many small factories and downsizing some others to combat the difficult macroeconomic conditions. It's also "re-sourcing" products to locations that offer more cost savings.

Though the company is looking at $400 million-500 million restructuring costs in the year, the steps already taken in 2013, and that are to be continued in 2014, will have some positive effects on costs in the current year. The full benefits of the overhaul are expected to start showing in 2015.

Rounding up
The current year for Caterpillar is going to be tough, but likely not as bad as 2013, and the first-quarter results are expected to reflect this sentiment. Important points to watch for are how badly the resources business is still suffering, and how much support it gets from the other two segments. One piece of anticipated good news to come investors' way will be about the $1.7 billion stock repurchase the company had planned for the quarter. So, stay tuned.

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