Caterpillar (NYSE: CAT ) is scheduled to release its quarterly earnings report tomorrow, and investors are bracing for a substantial drop in net income. Yet for all of Caterpillar's woes, the long-term question is whether the pullback is part of a normal cyclical decline or the result of longer-term macroeconomic trends toward slowing growth in formerly red-hot areas of the world.
Caterpillar has been one of the worst performers in the Dow Jones Industrials (DJINDICES: ^DJI ) this year, and the past quarter's plunge in gold and other metals prices only added to the downward fundamental pressure on the stock. What will it take for the company to turn itself around? Let's take an early look at what's been happening with Caterpillar over the past quarter and what we're likely to see in its quarterly report.
Stats on Caterpillar
| Analyst EPS Estimate | $1.70 |
| Change From Year-Ago EPS | (33%) |
| Revenue Estimate | $14.92 billion |
| Change From Year-Ago Revenue | (14.1%) |
| Earnings Beats in Past 4 Quarters | 2 |
Source: Yahoo! Finance.
When will Caterpillar earnings grow again?
Analysts have remained pessimistic about Caterpillar's earnings in recent months, cutting their June-quarter estimates by more than a dime per share and lowering full-year estimates for 2013 and 2014 by about 4% each. The stock has actually rebounded somewhat from its worst levels, rising 7% since mid-April, but it still remains below where it opened the year.
Most of those gains came right after the company's last earnings release in late April. Even though Caterpillar reported a 45% drop in net income and cut its guidance for full-year earnings and revenue, shareholders bid the stock higher in the days that followed. Possible evidence that high inventory levels could finally get resolved was at least one contributor to the relief rally.
Still, early figures make it clear that the sales slump continued for Caterpillar in the second quarter. Last month, the company reported that North American machine retail sales dropped 16% in the three months ending in May. Pair that with continued problems in Europe and sluggish conditions in China and elsewhere, and it looks likely that Caterpillar will see predictions of another plunge in revenue come to pass.
Caterpillar also lost fundamental support in one of the areas that have been keeping it going strong in the past: mining equipment. With the prices of gold and other commodity metals having fallen sharply, Caterpillar's mining business will be under pressure, and those conditions are likely to continue until heightened construction activity bolsters demand for industrial metals and pushes their prices higher enough to justify renewed growth of mining efforts. The share price performance of mining-equipment rival Joy Global (NYSE: JOY ) has echoed those fears, with its late-May earnings report including a nearly 12% drop in revenue and a lowered earnings forecast for the year.
In tomorrow's Caterpillar earnings report, watch for signs of positive impact from rebounding sentiment regarding the U.S. housing industry. With homebuilder confidence on the rise, the big question is whether rising interest rates will smother potential growth in construction activity. Short-term pressures may lead customers to defer buying Caterpillar equipment, but eventually the pent-up demand could produce a big boost to Caterpillar's earnings that will dwarf the negative effects on the stock in recent months.
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