Caterpillar Still Needs to Dig Itself Out of a Hole
Year to date, shares of Caterpillar (CAT) - Get Report are up 17%, but are still down 20% over the last five years. The company reports on Tuesday, July 26. I think the shares are overvalued.
The consensus estimate is looking for a 24.5% decline in earnings to 96 cents a share. Revenue is expected to fall 17.8% to $10.1 billion.
Investors seem to have been bidding up the stock based on overly optimistic projections. Last month, Caterpillar reported thee-month trailing sales figures. Monthly sales remain weak. Machinery sales have declined for 42 consecutive months.
In May, Caterpillar's mining business was down 27%. Construction sales declined 8% and North America construction remains weak. Energy and Transportation sales declined 30%, but that was an improvement over a fall of 34% in April. The Oil & Gas segment was down 41%, while Transportation was off 33%.
Last year, revenue declined 15%. Sales are poised to decline another 10% to 15% this year. Earnings declined 40.5%. Revenue in 2016 is expected to be between $40 billion and $42 billion, and adjusted earnings are forecast to be $3 per share.
In the first quarter, sales declined 25.5% to $9.5 billion, and adjusted earnings fell by 25.5%. Profit declined primarily as a result of sharply lower sales. Energy & Transportation fell $1.6 billion to $3.2 billion. Sales to the oil and gas industry made up over 80% of the decline in the Energy & Transportation segment.
On the first-quarter conference call, management guided lower and said customers are having a tough 2016. It sounded like business wasn't about to get better anytime soon.
Caterpillar cut $367 million of expenses since its cost-reduction program was launched in September of last year.
Investors who are trying to catch the bottom in Caterpillar shares will eventually get burned. I think Caterpillar is worth $50 a share, not the current quote of nearly $80. Historically, Caterpillar shares trade with a mid-teens multiple (15x to 16x), but investors have jumped into the stock hoping to catch the bottom. They are collecting the 4% dividend while they wait for the company to turn around.
While the company is well-positioned for an eventual pickup in demand, it's difficult to see any meaningful signs of a recovery.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.