Caterpillar Inc. (CAT) earnings out Thursday were a tapestry of cost cuts … and as counterintuitive as it may seen, that’s great news for CAT stock over the long haul.
True, the bottom in commodities prices is nowhere in sight. At some point, however, they will change course. That’s what cyclical markets do.
At that point, leaner and meaner companies like CAT will be primed to leverage the upswing. Caterpillar may be cutting costs today to survive, but when business finally picks up, lower expenses are going to really juice profitability. And you can be sure that CAT stock will rally as a result.
Of course, this is all pie in the sky at this point.
Commodities Still Weighing on Caterpillar
The rout in prices in crude oil and other critical commodities has no reason to reverse trend. China, Brazil and other emerging markets are suffocating demand. The U.S. and the rest of the developed world isn’t exactly punching its weight either.
That’s why Caterpillar stock is down nearly 30% over the last 52 weeks. It’s the world’s biggest maker of mining and construction equipment … and, well, no one needs more mines or wells when low prices only make them money losers.
CAT said it sees no relief in 2016, but who was predicting such a thing, anyway? All CAT can do in this environment is cut costs, and it’s doing a really good job of it.
Indeed, Caterpillar earnings per share are projected to rise sharply this year thanks to its restructuring, the company said. If it can string together several more quarters like the one just passed, CAT could even beat its own estimates again.
CAT’s Better-Than-Expected Earnings
For the fourth quarter ended Dec. 31, Caterpillar swung to a loss of $87 million, or 15 cents a share, compared with a prior-year profit of $757 million, or $1.23 a share. After stripping out some huge charges for restructuring costs, Caterpillar earnings came to 74 cents a share. That beat Wall Street estimate by a nickel, according to a poll by Thomson Reuters.
It was all because of cost cuts.
Operating expenses declined 15% to partially offset substantial top-line pain. Revenue fell 23% to $11.03 billion, missing analysts’ average forecast of had forecast $11.43 billion.
CAT has lost about $10 billion in sales since prices for everything from oil to coal to copper to iron ore started sliding two years ago.
The mission is clear. As CEO Doug Oberhelman said in a press release:
“Cost management, restructuring actions, and operational execution are helping the company while sales and revenues remain under pressure from weak commodity prices and slowing economic growth in developing countries. We took tough but necessary restructuring actions in 2015 — and they were significant.”
As a result, CAT was able to forecast full-year adjusted earnings of $4 a share vs. the Street projection of $3.48 a share.
The good news is this is the kind of news that can stabilize a stock. But big, sustained upside will have to wait. If you can hold on until this cycle winds its course, all these cost cuts are going to pay off with outsize profit growth — one day.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
