Used Equipment as Miners Bounce Back Could Drag Caterpillar in 2017

Much of a lift to beleaguered Caterpillar Inc. would not be provided as it is anticipated that commodities rebound would not be adding advantage to the company due to indications of ample use of construction-equipment supplies and restrained spending from miners.  The 2017 outlook for Caterpillar has trailed analysts’ estimates. There has consequently been a fall in the shares.

Stephen Volkmann, a New York-based analyst for Jefferies LLC, said that the lowered outlook “is happening because business still stinks.” “The recovery is certainly not happening yet.”

The company said it expects capital spending among miners to be flat and the availability of used construction equipment will weigh on sales in 2017. Amid continued weakness in some markets, in December, Caterpillar said analysts were overestimating its earnings prospects. The company said that it would not be until sometime in 2018 that any benefit from U.S. President Donald Trump’s infrastructure-spending plan and tax reforms would probably be seen.

On signs of an improving U.S. economy and stabilizing growth in China, the Bloomberg Commodities Index rose for the first time since 2010 and raw materials rebounded in 2016. The company said that mining-related sales may have suggestively bottomed due to improvements in quoting and order activity in the fourth quarter, along with higher commodity prices and better parts sales in each of the last three quarters.

Brad Halverson, Caterpillar’s chief financial officer, said in an interview: “frankly, the bigger issue is when will we get back to some normal replacement demand?” while raw-materials industries are showing signs of recovery.  “I would say that we’re not ready to call the recovery in 2017, but we feel a lot better this year than we did last year at this time.”

The Peoria, Illinois-based company said in a statement that the revenue will be in a range of $36 billion to $39 billion with a midpoint of $37.5 billion. That indicates annual revenue may fall for a fifth consecutive year and is less than the $38.1 billion average of 16 analysts’ estimates compiled by Bloomberg. Compared with the analysts’ estimate of $3.08, earnings excluding restructuring costs will be $2.90 a share at the midpoint.

In late October, Caterpillar warned that 2017 wouldn’t be much better as its customers defer orders amid sluggish growth and cut its 2016 sales forecast for a fourth time. Down from $47 billion a year earlier, the company reported 2016 revenue of $38.5 billion on Thursday. According to data compiled by Bloomberg, marking the lowest since the recession in 2009 would be the annual revenue of $37.5 billion.

Rewarding management for cost cuts intended to mute the effects of a drop in demand from miners and energy explorers, investors have made the company’s shares the best performer on the Dow Jones Industrial Average index in the past 12 months.

“We continue to execute in a challenging economic environment and are focused on improving operating margins, profitability and shareholder returns,” Chief Executive Officer Jim Umpleby said in the statement.

(Adapted from Bloomberg)


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