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Caterpillar Climbs on Earnings Beat but Still Faces a Tough Road Ahead

By Dan Caplinger - Jan 28, 2016 at 8:39AM

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Is the heavy-equipment maker finally ready for a turnaround?

Heavy-equipment specialist Caterpillar (CAT 1.46%) has faced challenging conditions in all of its businesses in recent years, posting some of the weakest performance among stocks in the Dow Jones Industrials (^DJI 1.27%) and putting long-term shareholders to the test as they waited for what they hoped would be a solid turnaround. Coming into Thursday's fourth-quarter financial report, Caterpillar investors were prepared for another big drop in revenue and net income. But even though the company didn't manage to grow to end 2015, it did give investors a hint of a potential recovery in 2016. Let's take a closer look at Caterpillar's latest results and its more positive outlook for the coming year and beyond.

Another quarter of falling sales and earnings for Caterpillar
Caterpillar's fourth-quarter results closely resembled what shareholders have gotten used to seeing from the equipment manufacturer lately. Revenue plunged almost 23% to $11.03 billion, which underperformed even the 20% drop that investors were prepared to see. Restructuring costs sent the company to a net loss for the quarter. But the highlight was that adjusted earnings of $0.74 per share came in a nickel higher than the consensus forecast among investors.

Overall, conditions remained weak for Caterpillar across the globe. North American sales fell 26% due largely to weak demand in energy and transportation. The Europe/Africa/Middle East segment suffered a 20% drop in sales for similar reasons, and Latin America plunged 36% because of the hard economic conditions hitting emerging markets in the region. Asia/Pacific sales fell 16%. Moreover, the strong dollar played a role in holding down revenue, and the euro, Japanese yen, and Australian dollar were especially weak during 2015.

Caterpillar reported falling sales in all of its business segments as well. Energy & Transportation and Resource Industries were the worst performers, with drops of 29% and 23% respectively, but Construction Industries sales also did poorly with an 18% drop. The Financial Products segment once again did the best but still saw its top line decline by 8%.

CEO Doug Oberhelman nevertheless accentuated the positive moves that Caterpillar has made. "Cost management, restructuring actions, and operational execution are helping the company while sales and revenues remain under pressure from weak commodity prices and slowing economic growth in developing countries," Oberhelman said, and the restructuring that Caterpillar has started contributed to its ability to outpace earnings expectations.

Can Caterpillar keep bouncing back?
Looking ahead, Caterpillar isn't entirely optimistic about the prospects for the industries it serves. The company's outlook doesn't anticipate any boom in economic growth globally or a dramatic rise of commodity prices. The company's revenue range of $40 billion to $44 billion would be another 10% hit to sales and is $3.5 billion lower than what Caterpillar had expected for 2016 a few months ago. Energy & Transportation could see a 10% to 15% decline in revenue, while Resource Industries is expected to see a 15% to 20% hit and Construction Industries could fall 5% to 10% from 2015 levels.

Yet where Caterpillar did surprise investors is with its earnings guidance. The company expects $3.50 per share if it can hit the midpoint of its revenue range, which is roughly consistent with what investors had expected coming into the announcement. Yet when you take out restructuring expenses, Caterpillar expects $4 per share in earnings, and that would be considerably higher than the consensus forecast currently.

Also, Caterpillar is still preparing for the future. Investments in research and development to boost its digital capabilities should pay off in the long run, especially as the Internet of Things builds out. Caterpillar expects those investments to produce faster growth when conditions improve.

Investors in Caterpillar were happy with the news, sending the stock up 4% in pre-market trading in the first hour following the announcement and giving some much-needed upward lift for the Dow Jones Industrials. Yet for Caterpillar to pull its weight in the Dow, it will need to find more ways to discover opportunities even amid the economic carnage throughout much of the world. Otherwise, short-term gains could evaporate quickly.

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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