The past 12 months haven't been very shareholder friendly for those invested in heavy equipment manufacturer Caterpillar (CAT 1.58%), that's a fact. Caterpillar has consistently reported weak demand for its mining equipment and other products over the last year as emerging markets continue to dial back capital spending.
When Caterpillar delivered a seemingly home-run with its first-quarter earnings it was a welcome change of pace for investors. Caterpillar crushed estimates and increased its earnings per share by 26% over last year's first quarter, to $1.81 per share.
If that wasn't enough, management even raised earnings-per-share guidance from $4.60 to $4.70; is this quarter a sign of a turnaround and is it finally time to buy Caterpillar?
Not so fast
While Caterpillar delivered a strong first-quarter, there was a large factor to consider for the gain. Caterpillar recorded a $120 million pretax gain from selling its remaining stake in a logistics business, and that wasn't originally included in the company's 2015 guidance. That largely nullifies management's raised guidance, especially when you combine that with the following comments from Mike DeWalt, vice president, finance services, speaking during Caterpillar's conference call in regard to the raised guidance:
While we held the top line and made a modest improvement to the bottom line of our outlook, 2015 is still shaping up to be uncertain and challenging year.
Allow me to expand on that.
As investors know, Caterpillar is a cyclical company and right now the low cost of oil is expected to primarily drive the company's revenue nearly $5 billion lower this year, compared to 2014. There are a couple reasons behind why oil causes Caterpillar's sales to decline.
Idle Caterpillar products on a showroom floor. Image source: Caterpillar
The most important reason is because Caterpillar sells engines and other equipment that drilling companies need to service wells, and that demand has plunged lower with oil prices. Also, some emerging markets where Caterpillar has a sales presence rely on oil income to fund economic projects and construction, and that demand has also taken a beating.
Worse yet, management expects that the worst pain from low oil is yet to surface this year and believes that the first quarter will be Caterpillar's strongest performance of the year. That's especially true when you consider there continues to be weakness in Brazil, slowing growth in China, Europe being unpredictable, little to no improvement in mining demand, and the dollar strengthening against many global currencies is causing pain as global sales translate into fewer dollars -- a pretty nasty environment for Caterpillar investors.
Silver lining?
While the low cost of oil is currently a thorn in the side for Caterpillar's growth, it's a double-edged sword. Initially it causes weaker demand for drilling, thus crippling demand for Caterpillar products in its energy and transportation segment, but long-term weakness in oil prices will spur construction and growth projects due to lower costs. That will have a strong positive influence on Caterpillar's other business segments, such as construction and machine retail.
Also, while foreign exchange is hurting global companies bringing sales dollars back to the U.S., it also means that doing business overseas costs less. Thus, if Caterpillar can take advantage of a strong dollar and invest in needed capital expenditures in its global factories, it will further set the company up for a rebound once global demand improves -- and at some point, it will.
Sadly, there is no crystal ball for these types of cyclical companies. Caterpillar is a well-run company and has a strong business foothold across the globe, but there isn't a V-shaped recovery on the horizon for its business segments. Expect 2015 to be increasingly painful, and 2016 might not be much of an improvement. Caterpillar also trades around 17x earnings, and while that's a discount to the S&P 500, that's probably still too high for a company that doesn't see improving demand over the next 12 months.
To me, it still doesn't appear like the right time to buy Caterpillar.
