Caterpillar (NYSE:CAT) reported its earnings last week. The results? Although the company beat analyst expectations, revenue was down, and cost cutting is the order of the day.
In this video segment, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe go over the main points from Caterpillar's conference call. They also talk about what's causing the company's trouble, and how investors should consider the relatively low price the stock's trading at today.
A transcript follows the video.
This podcast was recorded on Jan. 28, 2016.
Sean O'Reilly: I was curious what Caterpillar had to say. They're stuck in the midst of a three-year bear market for commodities, and up until 18 months ago, oil and energy was the last holdout for their machinery and everything. And that hasn't panned out either. So, they actually reported this morning, and the earnings were pretty good. They beat a little bit. Obviously, revenues and everything were down. Revenues came in at $11 billion, down from $14.2 billion in Q4 2014.
They reported a loss of $0.15 per share, but they would have reported gap profits of $0.74 had they not taken a $900 million hit from restructuring costs. So, I mean, investors really should keep that into account, because any large organization like that, they're going to have restructuring stuff all the time. You shouldn't really take any credence of that $0.74 per share number. Anyways, management talked exclusively about how tough it is out there, and they went on and on about how they're cutting costs. That was literally half of their call, their press release, everything.
Taylor Muckerman: Yeah. Schlumberger laid off a bunch of people, but Caterpillar's been laying off people for a couple years now.
O'Reilly: It's getting hairy, yeah. And of course, I was really interested in what they thought about their 2016 outlook. They do not anticipate any bounce back. Obviously, they're not just an oil missionary. They do copper, all the mining machinery and everything. And they're not expecting an improving demand picture at all for their equipment. They called for sales and revenues around $42 billion, and gap earnings per share, I was happy to see this, of $3.50 per share.
Tyler Crowe: Not the worst.
O'Reilly: Not bad.
Crowe: What was it this year? I think total year was somewhere, $4.00 and change.
Crowe: So, it's not the worst in the world. Obviously, Caterpillar's a cyclical business, just like everything else here, and we'll probably see a lag on pick up on equipment similar to what we were talking about with drilling activity, where, they're probably not going to be buying any new equipment until prices go up--
O'Reilly: You have to pay your bond holders back (laughs).
Crowe: Pay the debt and stuff like that. But, at today's prices, if we're looking at, as a long-term investor, is their value baked into shares nowadays? Or do you think, maybe hold off a little?
O'Reilly: And that's how I went into this, like, "Oh, we're at the bottom of the cycle, things are getting really bad, maybe it's a buy now." They're trading at $59 and change this morning, it's up like 1.5% on earnings. It's down from, I think, $110 a year ago or something, it used to be well over $100. But you've heard me say, the guidance for 2016 is $3.50 a share. So, they're trading at 16x forward earnings. I think that's more than fair, given we don't know when things are going to rebound, we don't know when earnings are going to rebound. The market multiple is 19 or 20 right now. So, I think it's fairly valued.