What Investors Need to Look for During Caterpillar Inc.'s Second-Quarter Presentation

Here are some factors investors should be keeping tabs on during Caterpillar's second-quarter presentation Thursday.

Jul 23, 2014 at 12:06PM

Caterpillar's (NYSE:CAT) top and bottom lines have struggled during a mining downturn overseas, and it's been ugly. Caterpillar's Resource Industries business segment -- which is linked to the mining market, and was once the company's profit machine -- has completely spiraled out of control in terms of earnings. However, despite the heavy-equipment manufacturer's struggles on the top and bottom line, investors have only sent the stock higher during the last two years.

Here's what investors should be looking at during Caterpillar's second-quarter conference call Thursday, and one reason investors are OK with waiting for a rebound in its overseas business.

Sales in the dumps
Caterpillar's business is separated into two sections: Machine, Energy & Transportation (M&ET) segment, and its finance division. The majority of its revenues and profits is driven by M&ET and, until recently, it was distributed evenly between the three components that make up M&ET.

Chart by author. Information source: Caterpillar SEC filings.

The only aspect that was worse than Resource Industries' plunge in revenues was its more-drastic decline in operating profits. What was once Caterpillar's chief money churner quickly became its bottom feeder.

Chart by author. Information source: Caterpillar's SEC filings.

Now, here's what we know going into Thursday's conference call, and what investors should be looking for during Thursday's second-quarter presentation.

Can resource industries' decline be offset?
First, we know that Caterpillar's overall three-month rolling sales data declined 12% at the end of May. While that isn't all the information that will be packed into Caterpillar's second quarter, it certainly isn't a good start, and it represents two of the three months in the second quarter. Hoping for a sales surge in June to spark revenue in the quarter isn't likely.

We also know not to expect a silver lining in Caterpillar's resource industries segment; it will remain extremely weak until mining markets gain momentum overseas. That isn't likely to change for at least a year, perhaps longer.

However, investors need to keep an eye on the other two segments: Construction Industries and Energy & Transport. Caterpillar have been limping along because these two segments have offset some of Resource Industries' decline. However, heading into the second quarter, Energy & Transport could be faltering, which would make offsetting a decline in Resource Industries even more difficult.

May's three-month rolling data was the first time this year Caterpillar's Energy & Transportation retail sales declined. The segment's 3% decline in May compares unfavorably to March and April's respective gains of 7% and 3%. If June continued that downtrend, it's likely that Caterpillar's Energy & Transport segment will falter in revenues and operating profits, which leaves only Construction industries with an improving business.

That's not a great recipe for short-term success, whether or not Caterpillar manages to beat Wall Street's estimates in the second quarter. While results in Caterpillar's M&ET will be a big focus for investors, here are a couple of other factors to look for.

Backlog, cash flow, and costs
Taking a quick look back at 2013, when Caterpillar's revenues slid $10 billion and its profit nearly $3 billion, it was able to reduce costs by a significant $1.2 billion. Recently, in Caterpillar's first quarter, cost-reduction measures lowered its SG&A and R&D expenses by $152 million. That reduction aided in Caterpillar's 5% rise in profits, while revenues remained flat compared to last year's first quarter.

Also, with sales struggling, investors would be wise to listen for Caterpillar's backlog of orders. At the end of the first quarter, its backlog checked in at $19.3 billion, which was a $1.3 billion increase from the previous quarter. Investors would cheer if the backlog grew a larger amount than witnessed during the first quarter.

Investors would also be wise to keep an eye on Caterpillar's cash flow during the second quarter. Despite Caterpillar's M&ET revenues and operating profits plunging 25% and 51%, respectively, during the last eight quarters, Caterpillar's stock has actually increased 17% since 2012. One reason behind Caterpillar's rise in share price, despite gloomy business performance, is that the company remains a cash-flow generating machine.

Consider that the company recorded its two best years of cash flow in its entire history during the last two years. Moreover, that cash flow has been returned to shareholders through dividends and share repurchases. Even during Caterpillar's rough patch during the last five quarters, it has managed to return $5 billion to shareholders through dividends and share buybacks. If, for some reason, Caterpillar loses its ability to generate this cash flow, it will be a big blow to investors.

While the weak mining industry will continue to weigh Caterpillar's earnings down for some time, the company is making huge strides in reducing costs, and will be a much stronger company when global demand for its products returns. Keep an eye on the factors discussed above, and you'll have a better idea when Caterpillar would make a nice addition to your portfolio.

Top dividend stocks for the next decade
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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information