Caterpillar Inc. (NYSE:CAT) earnings exceeded analysts’ average quarterly forecast as U.S. strength more than made up for weakness in China, but the good times have already run their course. Indeed, CAT warned investors not to expect a repeat of Q1 for the rest of 2015.
That’s an old story, however, as China’s economic growth rate has slowed in recent years to touch a 25-year low. That in itself would be bad news for CAT. The drop in demand from China has hurt prices across a number of assets, notably commodities like iron ore, coal and copper.
As the world’s largest maker of construction and mining equipment, CAT is supremely sensitive to anything that effects commodities prices, as well as global growth.
And now a couple of more recent developments have conspired to make life even harder for CAT stock. CAT is a major supplier of equipment to the oil and gas industry, but tumbling energy prices have but the kibosh on new exploration and production and — by extension — demand for CAT gear.
Meanwhile, the strong dollar is hurting revenue at CAT, just like every other U.S. multinational.
CAT Earnings: One and Done
In the most recent quarter, CAT got something of a reprieve from its troubles, thanks to a pick up in construction in the U.S. and North America. And even there, CAT said the picture is one of anemic — but steady — growth.
That’s better than the alternative, of course, which is what CAT is seeing everywhere else. Sales in Asia tumbled 21% in the first quarter because of China and the strength of the dollar against the Japanese yen.
Latin America was hit even harder, as sales fell 23%. The dysfunctional and shrinking economy of Brazil was largely to blame.
Most importantly, CAT doesn’t expect the U.S. and North America to bail it out again anytime this year. CEO Doug Oberhelman went on CNBC to warn investors that CAT won’t be able to pull off a repeat of Q1 for the remainder of 2015.
Against that backdrop, the upward tweak to its earnings guidance means little to CAT stock. All it really does is account for a stronger-than-expected first quarter.
For the record, Caterpillar earnings rose 20% to $1.11 billion, or $1.81 per share, from $922 million, or $1.44 per share, a year earlier.
On an adjusted basis that excludes restructuring costs, earnings came to $1.86. On that basis, Wall Street analysts were only looking for earnings of $1.35, according to a survey by Thomson Reuters. However, sales fell 4% $12.7 billion, which beat Street forecasts for $12.38 billion.
And that’s that. The big beat on earnings helped CAT lift its full-year forecast to a maximum of $4.70 per share from the $4.60 per share it was eyeballing earlier. The sales outlook remains unchanged at $50 billion.
With the remaining quarters of the year projected to be worse than the first quarter, it’s unlikely that CAT stock is going to exit its long-standing rut. Shares are off 6% for the year-to-date already.
With much of the world held back by geopolitical instability and weak growth, CAT stock looks like its going to trading around current levels — or lower — for some time.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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