Caterpillar Rally Imperiled as Sales Recovery Proves Elusive

Updated on
  • Company expected to post fifth straight annual revenue drop
  • Caterpillar shares lead Dow Jones Industrial after cost cuts

Track marks scar the ground near a row of Caterpillar Inc. equipment.

Photographer: Daniel Acker/Bloomberg

Caterpillar Inc. is the best-performing industrial stock this year on bets its cost-cutting efforts will reap rewards as demand recovers. The problem is, demand’s not recovering.

The world’s biggest maker of construction and mining equipment is expected to forecast a fifth straight annual sales decline in 2017 when it reports quarterly earnings on Tuesday. Revenue will slip to $39.5 billion in 2017 from $40.1 billion this year, according to the average of analysts’ estimates tracked by Bloomberg. It was $47 billion in 2015. The Peoria, Illinois-based company hasn’t had an annual revenue gain since posting a record in 2012.

A rebound in prices for commodities, which entered a bull market in June, has yet to translate into resurgent demand for the engines, giant trucks and shovels that Caterpillar makes. Miners and energy customers have been cutting costs to buttress profit after raw materials from crude to zinc slid last year. The sluggishness in sales suggests Jim Umpleby will have his work cut out for him in maintaining share gains when he takes over from Doug Oberhelman as chief executive officer in January.

“They’ve done well on the cost side, but the end markets are still going to stink for the new guy,” said Karen Ubelhart, a New York-based analyst at Bloomberg Intelligence. “Those mining and energy markets may be down by a little less in 2017, but CAT sales aren’t necessarily going to turn because there’s a long lead time with equipment.”

Stock Watch

Caterpillar shares have climbed 27 percent this year, the best performance on the 30-member Dow Jones Industrial Average, which has gained 4.1 percent. The stock is expected to fall to $79.53 in 12 months from Friday’s close of $86.33, according to the average estimate of analysts tracked by Bloomberg.

Caterpillar declined to comment ahead of its earnings release.

Profit in the third quarter excluding one-time items was expected to be 76 cents a share, the average of 18 estimates compiled by Bloomberg.

Caterpillar’s global retail sales of machines slumped 18 percent in the three months through September from a year earlier, with only the Asia-Pacific region growing, the company said on Monday.

General Electric Co. may not grow this year, the Boston-based company said Friday, as still-low oil prices, a strong dollar and a sluggish economy crimp demand for oilfield equipment and locomotive parts.

Oberhelman, who will stand down as CEO on Jan. 1 after taking the helm in July 2010, poured almost $20 billion into research and development, capital spending and deals over a couple of years, only to see emerging markets slow and commodity prices fall.

Cutting Initiative

Since then, Oberhelman reorganized mining and energy segments, shutting down dozens of factories and eliminating thousands of jobs. A years-long initiative to streamline the company’s supply and distribution network has yielded results as its gross margin has climbed annually since 2013, even as revenue slumped.

The timing of the leadership change, announced about a week before the earnings report, suggests forecasts for a fifth consecutive year of revenue declines in 2017 will be confirmed, JPMorgan Chase & Co. analysts Ann Duignan and Thomas Simonitsch said in a note to clients.

“People have been buying the shares because they don’t think things can get much worse and don’t want to miss a big move up as mining and energy recover,” said BI’s Ubelhart. “They may start to get frustrated if things don’t turn in a few quarters.”

— With assistance by Danielle Bochove, and Shruti Singh

(Updates with 3-month sales in eighth paragraph.)
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