by Dan Burrows | January 27, 2014 12:34 pm
Caterpillar (CAT) earnings beat Wall Street estimates by a wide margin, and the company raised its forecast, helping CAT stock jump sharply as the company puts a painful year behind it.
CAT stock popped 7% at Monday’s opening bell, helping the world’s largest maker of mining and construction equipment get off to a good start after a terrible 2013. The S&P 500 may have gained and amazing 30% last year, but Caterpillar stock rose just 1.3%.
However, that dead-money trade could be reversed this year if the latest batch of Caterpillar earnings are indicative of a new trend.
Yes, the slowdown in global mining continues to be worse than Caterpillar forecast, and will no doubt remain a headwind for CAT stock. However, Caterpillar earnings showed strength in construction equipment and power systems, thanks to an accelerating recovery in the U.S. housing market. That’s good news for anyone holding Caterpillar stock.
Combine that pickup in housing with cost cuts and some financial engineering, and CAT stock could go a long way toward making up for last year’s underperformance.
In the most recent quarter, Caterpillar earnings came in $1 billion, or $1.54 per share. That’s up from $697 million, or $1.04 per share, a year earlier. Analysts surveyed by FactSet were looking for Caterpillar earnings to come in at $1.27 per share.
Revenue continued to fall — hurt by declining capital expenditures at mining companies amid soft commodity prices — but it did exceed the Street forecast. For the most recent quarter, the top line dropped 10% to $14.4 billion from $16.08 billion a year ago.
The bottom dropped out of the mining boom to an extent that surprised even Caterpillar CEO Doug Oberhelman. From 1999 to 2005, global mining spend totaled $174 billion, according to an analysis by JPMorgan Chase. Over the next seven years, mining companies spent a total of $676 billion.
But now capital spending by the mining sector is in free fall. It dropped more than 25% last year, and is expected to shrink at least 20% in 2014, according to analysts at JPMorgan Chase.
Naturally, Caterpillar expects more weakness in mining this year, but the pickup in the global economy and U.S. housing market should equate to higher sales in construction and power systems, limiting the damage.
Caterpillar is also paring costs sharply, shutting down plants and shedding workers. As of October, the company laid off more than 13,000 employees in the preceding 12 months.
Those costs cuts helped Caterpillar earnings beat estimates. Share buybacks do their part, too. To that end, the company approved another $10 billion to repurchase CAT stock. That will kick in after the company buys about $1.7 billon in CAT stock in the first quarter as part of its existing $7.5 billion program.
The bottom line is that the company forecast full-year Caterpillar earnings — excluding restructuring costs — of $5.85 per share. That’s ahead of the Street estimate for Caterpillar earnings to hit $5.75 in 2014. Caterpillar also guided revenue higher, to $56 billion vs. analysts’ estimate of $55.36 billion.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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