Is Caterpillar a Good Investment?

Caterpillar Inc. (CAT) announced first quarter ended March 31, 2016 total revenue of $643 million, down 7 percent year-over-year from $689 million during the same period last year. Going forward, Caterpillar has provided sales and revenue guidance for the complete fiscal year 2016 and estimates it to be in $40 billion to $42 billion range.

Suffering weakness

Caterpillar declared first quarter of 2016 profit of $100, down 25 percent year-over-year from $133 in first quarter of 2015. Moving ahead, adjusted profit outlook for 2016 is estimated to be about $3.70 per share.

The farm and construction machinery manufacturer and distributor reported continued year-over-year decline in both its top and bottom lines mainly due to nearly $23 million of unfavorable effects from weaker average returning assets and about $13 million of unfavorable effects from weaker financing rates on an average.
The decline in Caterpillar’s bottom line was driven by nearly $17 million decline in net average yield and reflecting unfavorable currency impacts coupled with changes in the geographic mix.

Caterpillar declared $9.461 billion of net sales and revenue for first quarter of 2016, down 26 percent year-over-year from $12.702 billion during the same period last year and mainly due to weaker sales volume comprising of lower sales for both aftermarket parts and new equipment operating segments along with unfavorable currency translations and price realization.

The key mining equipment manufacturing company reported first quarter of 2016 operating profit of $494 million, down 71 percent year-over-year from $1.702 billion of operating profit during the same period last year and primarily driven by weaker sales volume that includes poor products mix, arising from ongoing weaker global commodity demand and pricing environment coupled with unfavorable restructuring costs and weak price realizations.

Caterpillar continued to deliver weaker year-over-year top line and bottom line results for the quarter primarily due to unfavorable foreign currency translations and weaker global commodity demand and pricing environment, eating into the company’s key margins and forcing it to adopt strategic restructuring operations.

What next?

The planned acquisition of Bucyrus in 2016 converged well with Caterpillar’s global expansion strategy coupled with its aggressive addition of manufacturing plants all through the international markets to seize the expanding construction machinery demand. However, these growth plans suffered a setback with the return of international slowdown in commodity demand and pricing environment, negatively impacting the company’s key margins and forcing it to seize all growth operations while adopting key restructuring plans.

Moving ahead, the global weakness in oil prices are believed to poorly effect reciprocating engine sales in construction, transportation and energy industries’ key sales across oil-producing nations all through the globe. The unfavorable impact of the strengthening US dollar on sales external to the US, poor mining sales and weaker sales in Caterpillar’s rail business, particularly for locomotives along with weaker sales across China, mainly for construction kits.

Caterpillar is expected to have made significant growth investments at an accelerated pace including, both inorganic expansion efforts and through continuing operations which is believed to put downward pressure on the company finances while restricting it to offer shareholder returns.

The key mining equipment manufacturer has contributed approximately $367 million of smaller period expenses during the first quarter of 2016 by strategically executing restructuring efforts declared last September which has primarily allowed Caterpillar to uniquely invest into research and product development activities.

Conclusion

Overall, the investors are advised to “Hold” their position in Caterpillar Inc. considering the company’s satisfactory long-term growth prospects but, currently weaker financial position with notable total debt of $38.37 billion against weaker total cash position of $4.74 billion only, restricting the company to continue with its daily operations profitably. The profit margin of 2.58% seems satisfactory. However, the PEG ratio of -17.31 is disappointing and indicates no growth but decline compared to somewhat healthier industry’s growth average of 0.60.
Published on Jun 9, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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