In yesterday’s trade, Caterpillar (CAT, Financial) decreased by 7.2% as the company reported its 4Q14 results. This article discusses the company’s results and the outlook for 2015 that makes me bearish on the company for 2015. Therefore, my view is that investors need to avoid the stock over the next 3-4 quarters even when Caterpillar is an excellent long-term portfolio stock.
Coming to the results, Caterpillar reported full year revenue of $55.2 billion and EPS of $5.88 per share for 2014. While the full year sales and EPS for FY14 were not significantly different from FY13, the company’s 4Q14 results were disappointing and were an indication of results to come as oil prices remain low.
For the fourth quarter of 2014, the company’s revenue was $14.2 billion, down from 4Q13 revenue of $14.4 billion. The EPS decline was more significant at $1.23 per share as compared to $1.54 per share in 4Q13. The weak results were due to two factors – First, the decline in sales related to the oil and gas industry on the back of lower oil prices. Second, the weak sales trend that continues from China due to weak economic growth.
While the weak results translated into a slump in stock price, the bigger concern for me is the outlook for 2015. For this year, Caterpillar expects revenue of $50 billion and an EPS of $4.6 to $4.75 per share. Therefore, the revenue and EPS will take a strong hit during the year. This will ensure that the stock remains depressed.
The important point to note is that oil prices might stay lower for 2015 and if this happens to be the case, Caterpillar is likely to record even lower sales. Further, according to IMF, China’s GDP growth will be lower in 2015 as compared to 2014 and the economy has still not bottomed out. Therefore, besides depressed sales in the oil and gas segment, the company’s resources segment will also continue to witness lower sales through 2015.
Considering this gloomy outlook, it is not surprising to see the stock slump by nearly 13% in 2015YTD and I believe that the downside might continue for Caterpillar. Considering a 2015 EPS of $4.6 per share, the stock is trading at a forward PE of 17.4. This is expensive considering the expectation of low growth in 2015 and potentially in 2016.
I must also add here that geo-political tensions are also a concern for Caterpillar and rising geo-political tensions in Commonwealth of Independent States, Africa and the Middle East can impact the company’s sales trend. This is also a uncertain parameter and can spring a big negative surprise if geo-political tensions in these regions escalate.
The important point here is that there are several factors that contribute to uncertainly for 2015 and this includes geo-political factors, the period for which oil prices remain low and a sharper than expected decline in economic activity for China.
Considering all these factors, Caterpillar is a stock to avoid even when the stock provides a current dividend of $2.8 per share and an attractive dividend yield of 3.3%. Further, Caterpillar is likely to continue with its share repurchase in 2015. These factors still remain small as compared to the uncertainty that exists in relation to the likely sales and EPS outlook for 2015.
