Heavy equipment machinery giant Caterpillar (CAT, Financial) reported its fourth-quarter earnings on January 27 which was not at all impressive and failed to meet the Street estimates. In the current environment of continuous decline in crude oil prices, it seems that the established equipment maker is starting to feel the heat and the management has reflected the same in the outlook for the coming fiscal year where all predictions are below those achieved in the previous fiscal year. All attention is now fixed on what Caterpillar is bound to see in the near future and the stock has already reacted negatively to the earnings results and has plunged about 8% downwards following the earnings release in pre-market trading. Let’s take a dive and find out what got conveyed in Caterpillar’s fourth quarter.
The terrible set of numbers get displayed
Profit for the fourth quarter came to $757 million or $1.23 a share, down from $1 billion or $1.54 a share reported a year earlier. The quarter sales also edged down 1% on a yearly basis to $14.24 billion. Excluding restructuring costs the earnings stood at $1.35 a share, down from $1.68 a share reported a year ago. In fact, the revenue was able to surpass the Street estimates of $14. 18 billion, but the earnings grossly missed the estimates of $1.55 a share.
Though there was positivity in sales and demand felt in the construction line of business, the decline in oil prices is delaying the drilling activities and the relatively slow growth in the world economy along with the weakness noticed in the commodity prices particularly oil, coal, copper and iron ore, has deterred miners from buying new equipment and has led to sales decline continuing in the mining segment for Caterpillar. Operating profit from the mining segment was down 67% to $72 million this quarter, when compared on a year-over-year basis.
The energy and transportation segment did see an improvement in operating profit which stood at $1.08 billion, up 10% from what was recorded a year ago.
During the earnings call, Mike DeWalt, Caterpillar’s vice president, stated, “It’s shaping up to be a much tougher year than we were expecting” three months ago. He added that the plunge in crude oil prices to around $46 a barrel from $80 in October has tremendously hurt its business domains. Even the Chairman and CEO Doug Oberhelman seemed disturbed with the profit figures taking a plunge in almost every quarter of 2014, and he said, “We are disappointed that we missed our profit outlook in the fourth quarter…” He further added that as the headwinds continue to gain momentum in this fiscal year, there could be drop in profits and sales going forward, irrespective of cost cutting strategies adopted by the equipment honcho.
Outlook remains rather dim
The Peoria, Illinois-based maker is finding the road bumpier than it had thought of earlier. That’s the reason why it has forecasted a 9% further drop in sales and a 22% drop in per-share earnings going forward into 2015.
In fact, Mike DeWalt said that the company hopes that the mining profit plunge saw its bottom in 2014 but does not see any chance for a rebound in sales in the coming fiscal year. Meanwhile, with the Chinese economy showing slow signs of growth, sales in China are expected to fall or remain flat this year. Restructuring costs have been forecast at $150 million, down from the massive $441 million booked in 2014 when the company spend excessively for scaling back the large plant at Gosselies, Belgium. Caterpillar has taken resort to such cost cutting initiatives to reduce the impact of external factors that are impacting its bottom line drastically for the past few quarters at a stretch.
The equipment maker now expects earnings of $4.60 a share in 2015, down from $5.88 a share in 2014 for the full year. Though the earnings had seen a slight revival in 2014 due to restructuring activities after knocking down 32% in 2013 due to mining slump, the potential drop in oil prices would lead to a collapse in the earnings moving forward.
Sales in 2015 is also projected downwards to about $50 billion, down from $55.18 billion in 2014, and is expected to come down for the third year at a row after peaking at $65.9 billion in 2012.
Last word
As Caterpillar moves forward into the next fiscal year, the management has taken a cautious stand and has forecasted lower earnings and revenue from that noticed in 2014 as the headwinds continue to take charge going forward. Though Caterpillar’s earnings report seems all in the red at the present moment, such headwinds would affect its numbers temporarily and the company expects this phase to get wiped off in the next few years. Meanwhile, it’s relying heavily on cost-cutting measures to keep its bottom line downfall well within limits.
