Caterpillar Crushes Earnings Estimates, Shares Jump
Zacks Investment Research | Oct 23, 2014 01:28PM ET
Caterpillar (NYSE:CAT) was up about 3.86% in pre-market trading and continues in intraday trading on Thursday as positive results come from their third quarter earnings. The Illinois-based company announced a profit per share of $1.63, an increase of 12% from same period last year. CAT beat Wall Street expectations, as consensus estimates called for $1.33 per share in earnings, allowing CAT to post a big beat of 25%.
Their earnings statement pointed out that their profit per share was hindered by “restructuring costs” that incurred a negative impact of 9 cents per share. Excluding restructuring costs, profit per share would have been $1.72 per share.
Caterpillar is expecting restructuring costs to be about $450 million for 2014, higher than previous estimates of about $400 million primarily due to restructuring programs related to mining.
The earnings release stated that the third quarter of 2014 included a negative impact of $0.09 per share for restructuring costs. Excluding restructuring costs, third-quarter 2014 profit per share was $1.72.
Third-quarter 2014 sales and revenues were reported at $13.549 billion, up from $13.423 billion since the same period last year. In their respective divisions, North America reported third quarter revenue of $5.973 billion, up 15%, Latin America reported $1.629 billion, up 19%, EAME (Europe Africa Middle East) reported $3.251 billion, up 2%, and Asia Pacific reported $2.696 billion, up about 7%.
“In addition to the profit improvement, we have a strong balance sheet and through the first nine months of the year, we’ve had good cash flow. So far this year, we’ve returned value to our stockholders by repurchasing $4.2 billion of Caterpillar stock and raising our quarterly dividend by 17 percent,” CEO of Caterpillar, Douglas Oberhelman, said.
“We are confident that, when we see more significant economic growth around the world, our consistent focus on operational performance will have prepared us to deliver even better results,” Oberhelman added.
Although the stock has been on a slight decline in the past months, Caterpillar continues to smash earnings expectations as it continues beating estimates by an average of 11.60% since last September.
2014 Outlook
The company now expects 2014 sales and revenues to be about $55 billion, about in the middle of the previous outlook range of $54 to $56 billion. While the mid-point of the sales and revenues outlook range has not changed, profit per share expectations for 2014 continue to improve.
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As previously stated in the example, the profit per share outlook is being adjusted with and without anticipated restructuring costs. With 2014 sales and revenues of about $55 billion, the revised profit outlook is $6.00 per share, or $6.50 per share excluding $450 million of restructuring costs.
That is an improvement from the previous profit outlook of $5.75 per share, or $6.20 per share excluding $400 million of restructuring costs at the mid-point of the previous sales and revenues outlook range of $54 to $56 billion.
“In January we provided our first profit outlook for 2014 at $5.85 per share excluding restructuring costs — our current outlook excluding restructuring costs is $6.50 per share, a substantial improvement. The fact that we continue to raise our profit per share outlook on relatively flat sales is a testament to our diverse portfolio of businesses, disciplined cost control and operational execution.”
Preliminary 2015 Sales and Revenue Outlook
Caterpillar views that the economic growth with continue to prosper in 2015 which will have a beneficial spill over impact on Caterpillar. From the report; ‘In developed countries, growth-oriented monetary policies should support continued modest economic improvement. In addition, we believe there is potential for increased investment in infrastructure in countries such as the United States, India and Turkey.
In developing countries, constraints on liquidity and raised interest rates are starting to slow down in 2014. This was imposed to control inflation or to protect their exchange rates and with the implication of slowing down, economic growth for developing counties seems promising. More recently, interest rates in many developing countries have stabilized and we saw the first monetary policy easing the third quarter of 2014.
There are still significant risks and uncertainties that remain and that could temper growth in 2015. Political conflicts and social unrest continue to disrupt economic activity in several regions, in particular, the Commonwealth of Independent States, Africa and the Middle East.
The Chinese government’s push for structural reform is slowing growth, and the ongoing uncertainty around the direction and timing of U.S. fiscal and monetary policy actions may temper business confidence. As a result, our preliminary outlook for 2015 expects sales and revenues to be flat to slightly up from 2014.’
Bottom Line
We currently rank Caterpillar as a Zacks Rank #3(hold), and estimate that fourth quarter earnings will come in at $1.61 per share. Consensus estimates also project the 2014 earnings to be projected at $6.24 per share. In the last two months, a majority of analysts have downgraded their earnings estimates for the current year until next year which could be attributed to their slightly lower than expected 2015 outlook.
Caterpillar is a reasonably priced stock with a P/E of 15.15 and with the stock taking a hit in the past couple months, investors should consider this a possible entry point for a reasonable price. The PEG ratio of 1.49 is indicating a growth rate in EPS of about 10% in the next year. This is an upward looking growth rate, and with a positive 3Q earnings result, investors should be very intrigued by the prospects of this Fortune 50 company.
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