Caterpillar, Inc. :CAT-US: Earnings Analysis: Q1, 2017 By the Numbers : May 5, 2017

Caterpillar, Inc. reports financial results for the quarter ended March 31, 2017.

We analyze the earnings along side the following peers of Caterpillar, Inc. – Cummins Inc., CNH Industrial NV, Komatsu Ltd. Sponsored ADR, Astec Industries, Inc. and General Electric Company (CMI-US, CNHI-US, KMTUY-US, ASTE-US and GE-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 9822 million, Net Earnings of USD 192 million.
  • Gross margins widened from 26.70% to 29.97% compared to the same period last year, operating (EBITDA) margins now 19.14% from 15.16%.
  • Year-on-year change in operating cash flow of 215.13% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings declined although operating margins improved from 7.34% to 11.91%.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-03-31 2016-12-31 2016-09-30 2016-06-30 2016-03-31
Relevant Numbers (Quarterly)
Revenues (mil) 9822 9574 9160 10342 9461
Revenue Growth (%YOY) 3.82 -13.2 -16.44 -16.03 -25.52
Earnings (mil) 192 -1171 283 550 271
Earnings Growth (%YOY) -29.15 -1245.98 -23.1 -22.54 -75.61
Net Margin (%) 1.95 -12.23 3.09 5.32 2.86
EPS 0.32 -2 0.48 0.93 0.46
Return on Equity (%) 5.72 -32.38 7.3 14.17 7.08
Return on Assets (%) 1.01 -6.2 1.46 2.81 1.38

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Market Share Versus Profits

Revenues History
Earnings History

CAT-US‘s change in revenue this period compared to the same period last year of 3.82% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CAT-US is holding onto its market share. Also, for comparison purposes, revenues changed by 2.59% and earnings by 116.40% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 26.70% to 29.97%, while operating margins improved from 15.16% to 19.14% over this period. For comparison, gross margins were 19.68% and EBITDA margins 1.17% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CAT-US‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 63.69 days from 75.25 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

CAT-US‘s change in operating cash flow of 215.13% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from 7.34% to 11.91%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 3.86% to 2.94%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Caterpillar, Inc. engages in the manufacture of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. It provides technology for construction, transportation, mining, forestry, energy, logistics, electronics, financing, and electric power generation. It operates through the following segments: Construction Industries, Resource Industries, Energy & Transportation, and Financial Products. The Construction Industries segment supports customers using machinery in infrastructure and building construction applications. The Resource Industries segment responsible for supporting customers using machinery in mining and quarrying applications and it includes business strategy, product design, product management, and development, manufacturing, marketing and sales and product support. The Energy & Transportation segment supports customers in oil and gas, power generation, marine, rail, and industrial applications. The Financial Products segment line business provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, solar gas turbines as well as other equipment and marine vessels. The company was founded on April 15, 1925 and is headquartered in Peoria, IL.

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