Putting Caterpillar Inc.'s Last 8 Quarters Into Perspective: Why Do Investors Hang Around?

Looking at Caterpillar's declining business recently and what upside remains.

Jun 25, 2014 at 6:06PM

It's easy to get sucked into the daily headlines and be unduly influenced by them, to the extent that investors narrow their investment horizons into short-term windows. If you are a shareholder, you're probably a little discouraged by Caterpillar's (NYSE:CAT) recent retail sales report -- and it was ugly, to be sure. The heavy-machinery maker faces some difficult quarters during the next year, but let's look at exactly where the company's business is at and why some investors remain optimistic.

Top and bottom lines
Looking at Caterpillar's top and bottom lines over the last eight quarters will offer a better grasp to what extent plunging sales in the company's resource industries segment have affected its business.

Graph by author. Source: Caterpillar SEC filings.

Eight quarters ago, Caterpillar's revenues were generated very evenly by its machine, energy, and transport business, or M&ET, which is Caterpillar's business outside of its finance division. M&ET is separated into the the segments highlighted in the graph above: construction industries, resource industries, and energy and transportation. As the quarters progressed, Caterpillar's overall business took a hit and China's commodity pricing and mining weakness sent the company's resource industries segment plunging -- with the bottom for revenue still looming. 

More telling, though, is Caterpillar's operating profit over the same eight-quarter time frame.

Graph by author. Source: Caterpillar's SEC filings.

While Caterpillar's revenue stream was generated evenly by its business segments, eight quarters ago resource industries hauled in the big bucks -- nearly as much operating profit as construction industries and energy and transportation combined. Fast-forward to today and resource industries' profits are a tenth of the other two segments combined, as of last quarter.

Ultimately, over the last eight quarters Caterpillar has witnessed its machine, energy, and transportation revenues and operating profits both plunge 25% and 51%, respectively. Yet, since 2012, Caterpillar's stock price has risen 15%. Clearly investors are hoping for a bottoming of Caterpillar's business and a quick rebound once the foreign mining end market picks up and begins driving sales of its heavy machinery again.

Here are a couple of other reasons why investors hang around.

Returning value and cutting costs
One of the best silver linings around these clouds for Caterpillar investors is the company's ability to consistently return value to shareholders. Since the beginning of 2013, through the last quarter, Caterpillar has returned more than $5 billion to shareholders through dividends and share buybacks. More impressive is that, despite a challenging business environment, the company's dividend has increased at a higher percentage each time it was raised. For example, the recent dividend increases check in sequentially at 5%, 13%, 15%, and 17% gains. All in all, Caterpillar's dividend yield of 2.6% is double that of peer Joy Global (NYSE:JOY)

One reason Caterpillar has been able to return value to shareholders is the company's focus on cutting costs. That also played a large role in Caterpillar's machine, energy, and transport businesses producing $1.9 billion operating cash flow in this year's first quarter. Cost-cutting involves layoffs, an unpopular but necessary part of business that Caterpillar has used to offset declining operating profits. 

Caterpillar's workforce has steadily been cut. Source: Caterpillar's annual reports.

Investors have also been intrigued by Caterpillar's hunt for new revenue from its dealers. The company believes its distributors are completely whiffing on between $9 billion and $18 billion in revenue annually because of poor communication, lack of execution, and inconsistent customer experience. Management has given dealers until the end of the year to develop a three-year plan to capture those potential sales. Gaining even a fraction of those potential incremental sales could generate incremental bottom-line profits.

Looking ahead
Caterpillar posted better than expected earnings in the first quarter, and the company boosted its 2014 earnings outlook by $0.25 per share to $6.10, excluding restructuring costs. Despite the company's ability to return value to shareholders, significantly cut costs, and develop a strategy to maximize revenue through its dealerships, a continued slump in sales and operating profit could set Caterpillar up for a sell-off late in 2014. After last year's 30% rise in share price, and the 19% increase so far this year, Caterpillar investors are optimistic for a rebound that already seems priced in. 

Dividend stocks like Caterpillar can vastly improve your portfolio!
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers