If it looks like a duck and quacks like a duck, it isn't a lion. That's essentially how Caterpillar's (NYSE:CAT) latest quarterly earnings played out when results were announced Tuesday morning. I wrote on Monday that Caterpillar's dismal three-month rolling retail sales ending in December hinted at a bad fourth quarter. My only reservation was that somehow Caterpillar had managed to beat company expectations for the last four quarters, despite top-line weakness, and had averaged 14% growth in year-over-year profit during the same four-quarter time frame.
That fell apart Tuesday morning with a weak fourth quarter, and looking at management's forecast for 2015, investors might want to get used to the pain.
By the numbers
Let's get some of the dreary numbers out of the way first. Starting with the fourth-quarter results, Caterpillar's sales and revenues declined from $14.4 billion during last year's fourth quarter to $14.2 billion. The big miss came on the bottom line, with overall profit declining by 25%. The pain obviously extended to Caterpillar's earnings per share, which were down to $1.23 compared to $1.54 during 2013's fourth quarter.
A couple of factors weighed on Caterpillar's fourth-quarter profitability. Restructuring costs were $97 million, an after-tax impact of $0.12 per share. Also, inventory declined by a much larger than anticipated amount, down $1.1 billion. This was a positive for Caterpillar's operating cash flow, but had a negative effect on the company's profit. Management also noted that seasonal costs in the fourth quarter were higher than expected.
Looking at the full year, Caterpillar's 2014 sales and revenue declined slightly from the previous year to $55.2 billion. Excluding restructuring costs, Caterpillar's earnings per share for the full-year 2014 were $6.38, still an improvement from 2013's $5.97. Another thing for investors to keep an eye on is Caterpillar's machine energy and transportation debt-to-capital ratio, which increased to 37.4% at the end of 2014 from just under 30% at the end of 2013.
It's clear, though, that Caterpillar's fourth quarter was much rougher than expected. Unfortunately, 2015 looks like it'll be a very challenging year. Sales and revenue are expected to drop from $55.2 billion in 2014 to roughly $50 billion this year. However, the real noticeable difference in Caterpillar's guidance is found on the bottom line. Management expects earnings per share, excluding restructuring costs, to decline from $6.38 in 2014 to $4.75 this year.
One of the major reasons behind these big drawbacks to Caterpillar's top- and bottom-line guidance is likely one you've heard of recently: lower oil prices. As you can see in the graph below, weakness in overseas mining has sent profits plunging in Caterpillar's resource industries business. It was partially offset by stronger performance in its energy and transportation segment.
Unfortunately, roughly one-third of Caterpillar's energy and transportation sales were related to oil and gas, and that will echo through a decline in sales for various Caterpillar products. In addition to oil, prices for copper, coal, and iron ore have continued to decline, putting additional pressure on the company's resource industries business.
Ultimately, lower oil prices should have a positive effect on the global economy, which should eventually benefit Caterpillar, but don't expect it to happen in 2015. Caterpillar is a long-term, global-growth bet, with the company focusing on returning value to shareholders in the meantime -- it repurchased $4.2 billion of stock last year and raised the quarterly dividend by 17%. With the stock trading more than 7% lower on Tuesday, it's clear investors are taking a short-term view, or losing faith in the global economic recovery.