Before Caterpillar reported third-quarter earnings I thought it was time to take profits. After all, the stock was up dramatically as investors already anticipated a massive turnaround.
At the time, the stock was at $87 and about to report results. The company missed on revenue as it fell 16.4%. Management blamed lower sales volume and weak commodity prices. Caterpillar slashed guidance and the shares fell to $81.
But just as the Caterpillar bulls were licking their wounds, the election came around and changed everything. The stock flew up on the prospect of lower taxes, less regulation and repatriation of overseas funds.
Last week Caterpillar reported fourth-quarter and full-year 2016 results. Fourth-quarter earnings per share of $0.83 was $0.16 better than expected, while revenue fell 13.2% to $9.57 billion vs. the $9.81 billion consensus estimate.
For 2016, revenue fell 18% to $38.5 billion and adjusted profit per share of $3.42 was down $1.93 from the year earlier.
Despite the poor top-line results, the company is seeing tremendous benefits from the restructuring it announced in the third quarter of 2015. So far, Caterpillar has closed more than 30 facilities, reduced manufacturing floor space by 14%, and cut the workforce by 16,000 persons.
Restructuring costs in 2015 and 2016 totaled $1.9 billion and the company expects an additional $500 million in 2017. By the end of 2017, CAT's expense structure is expected to be $2 billion lower than 2014.
Management guided 2017 revenue between $36 billion and $39 billion and adjusted profit per share to $2.90, below the consensus estimate of $3.08.
This was the second guidance cut in the last two months. At its December update, management was looking for adjusted EPS of $3.08 and revenue of $38 billion.
With the move in the stock, it's pretty evident investors have anticipated a massive turnaround in Caterpillar's business (which has yet to happen). In 2012, the company had revenue of $65.8 billion and EPS of $8.48. Even with a global business rebound, a return to those glory days looks a long ways away.
Even if there were a global rebound, you'd have to take estimates out to 2019, because of the sheer volume of used equipment on the market right now. It would probably take a year to absorb it.
CAT typically trades at between 20 and 30 times trough EPS. Assuming $2.90 is the absolute bottom, that means the shares are already at around 33 times estimates.
To get bullish on Caterpillar, I believe you have to assume a global rebound and EPS of more than $4 in 2018. Right now, I'm not willing to do that. I think 2018 will be flat with 2017 and earnings will not grow all that much despite the restructuring efforts.
I would take profits. I don't think this CAT will be purring much longer.