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Will Caterpillar Earnings Look Better in 2016?

By Dan Caplinger - Jan 22, 2016 at 2:15PM

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The heavy-equipment maker expects a lot more pain.


Image source: Caterpillar.

Cyclical giant Caterpillar (CAT -0.80%) has been a prime example of just how tough it can be for companies when they're struggling through an industry downturn. Just like fellow construction-equipment maker Manitowoc (MTW -5.22%), Caterpillar has had to deal with poor conditions in the infrastructure and construction arenas for years. Yet Caterpillar has also had other key areas of its business falter. The plunge in prices of commodity metals and energy products has further crushed Caterpillar's sales, and coming into its fourth-quarter earnings report on Thursday, Caterpillar investors are bracing for yet another round of poor results. Let's look more closely at what's been happening at Caterpillar and whether it can show any signs of a recovery in the near future.

Stats on Caterpillar

Analyst EPS Estimate

$0.69

Change From Year-Ago EPS

(49%)

Revenue Estimate

$11.44 billion

Change From Year-Ago Revenue

(19.7%)

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Can Caterpillar's earnings turn around?
Investors have finally hit bottom on their views of Caterpillar's immediate earnings, but they still have their doubts about the future. They've left their projections for fourth-quarter earnings unchanged in recent months, but they've cut their full-year 2016 estimates by more than $0.25 per share. The stock has followed its long pessimistic path, falling another 10% since mid-October.

Caterpillar's third-quarter results didn't give any investors very good news. The company's revenue fell 19%, which was even worse than most of those following the stock had feared, and net income dropped by two-thirds due largely to Caterpillar's restructuring efforts. Weakness prevailed across Caterpillar's geographical reach and in all of its target industries, and the Energy and Transportation segment got hit especially hard because of the downturn in crude oil and natural gas throughout 2015. The company also gave unfavorable guidance for 2016, projecting that overall revenue would be down another 5%, with the natural resources and energy units leading the way lower.

Since then, Caterpillar hasn't gotten any good news from its key markets. On the energy front, oil prices have only kept declining, falling below $30 per barrel by mid-January. CEO Doug Oberhelman has said that even at much higher prices, he feared that oil and gas exploration and production companies would cut back on their drilling activity. That would have a dampening effect on any future sales of industry-related equipment at Caterpillar. Moreover, prices of key precious and base industrial metals have also gone nowhere in recent months, pushing back any expectations of relief for hard-hit mining companies.

The new problems Caterpillar faces go beyond its segments. Economic turmoil in China has not only caused growth to slow, but has called into question certain systemic aspects of the emerging-market's entire economy, and the risk of a full-blown meltdown in China could be disastrous for Caterpillar. At the same time, other former high-growth markets like Brazil and South Africa have seen pullbacks as well, and that could hurt Caterpillar's business even further at the worst possible time for the machinery-maker.

Moreover, both Caterpillar and Manitowoc are suffering from a trend that has hit the industry. Increasingly, construction and mining companies are choosing to use second-hand equipment rather than buy new products from Manitowoc or Caterpillar. Maintenance costs on older equipment are higher than on new purchases, but customers would rather pay that smaller amount rather than commit to a larger purchase. Until that trend reverses, it'll be hard for Caterpillar to recover.

In Caterpillar's earnings report, investors should keep their eyes open for comments on whether customers are starting to hit the wall in terms of extending the life cycles of their equipment. With so much pent-up demand, Caterpillar should be able to clean up in the equipment industry once the logjam breaks. Still, as long as economic conditions are uncertain, Caterpillar investors might have to wait a long time before the eventual turnaround comes.

Dan Caplinger 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.

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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$195.93 (-0.80%) $-1.59
The Manitowoc Company, Inc. Stock Quote
The Manitowoc Company, Inc.
MTW
$10.72 (-5.22%) $0.59

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