Archive for the ‘Earnings’ tag
Terex shares creamed yesterday
Terex, one of Caterpillar’s smaller competitors in the mining and construction equipment space, took such a royal pummeling yesterday that I figure it’s worth mentioning even if it makes me look like a slacker for not blogging the news as it happened (you get what you pay for in the blogging business).
The real news started after the bell Wednesday, when the company reported a huge loss and said it expected mass layoffs. It got worse yesterday when an analyst noted the company is in danger of violating a covenant on debt due in April. Terex lost a third of its value in the space of 24 hours (though it was up a few percentage points this morning).
You have to wonder what Terex investors were thinking up until the day before yesterday. Cat shares were off by a third from their December high to their February low; it’s hard to imagine TEX avoiding a similar fate.
Terex’s earnings report sounds eerily familiar:
Ron DeFeo, Terex Chairman and Chief Executive Officer, stated, “This past year has been like no other – the first half of the year exhibited robust growth and expansion, while the second half of the year was severely impacted by the global credit crisis and economic deterioration, which drove significant declines in customer demand in our businesses. For the full year, net sales increased significantly in our Cranes and Mining businesses, but were offset by the results in our Aerial Work Platforms, Construction, and Materials Processing businesses, which experienced considerable weakness in the second half of the year. Excluding the goodwill impairment charges, our net income for the year was good given the economic environment. Although we are disappointed with our current working capital levels, we have taken aggressive actions to adjust our production to meet reduced customer demand. We maintained a strong cash position and ended the year with a solid balance sheet and sufficient liquidity to execute our key business plans.”
Mr. DeFeo continued, “Given the current market conditions, it is difficult to project 2009 performance with a reasonable degree of certainty. However, we are planning for continued softness in demand. We are experiencing increasing levels of cancellations in our backlog for crane and mining products, as well as delays in acceptance of deliveries, as our customers in these areas are not immune to the effects of the global economic downturn. Based on what we know today, we expect our net sales for 2009 to decline by 30% to 35% from 2008. The translation effect of foreign currency exchange rate changes is expected to contribute approximately 13% of this decline. Given the uncertainty and volatility in today’s environment, we are not providing earnings guidance until we have better visibility; however, we will continue to take aggressive actions to reduce operating costs and improve our cash flow.”
Ah, that old “lack of earnings guidance” bugaboo: it’ll bite you every time.
Perhaps TEX investors did not expect the company to take a $460 million Q4 loss for “goodwill impairments in the Construction, Roadbuilding and Utility Products businesses, where the recorded value of those assets exceeded their fair value due to lower projected results for these businesses resulting from adverse market conditions.” Goodwill losses don’t affect cash flow much, though lowered asset values would mean less collateral to borrow against.
Looking ahead, Deere’s in the headlights next week:
WEDNESDAY, Feb. 18
WASHINGTON — Commerce Department releases housing starts for January, 8:30 a.m.; Federal Reserve releases industrial production for January, 9:15 a.m.; the Federal Open Market Committee releases minutes from meeting held in January, 2 p.m.
NEW YORK — CBS Corp. reports fourth-quarter financial results.
PHILADELPHIA — Comcast Corp. reports fourth-quarter financial results.
MOLINE, Ill. — Deere & Co. reports first-quarter financial results.
AKRON, Ohio — Goodyear Tire & Rubber Co. reports fourth-quarter financial results.
PALO ALTO, Calif. — Hewlett-Packard Co. reports first-quarter financial results.
AUSTIN, Texas — Whole Foods Market Inc. reports first-quarter financial results.
Cummins plans job cuts as earnings dive
Cummins, a key Caterpillar competitor in diesel engines and power systems, reported today that its fourth quarter profit fell 55 percent and it plans to cut its workforce by 6 percent this quarter.
“We are in an extraordinarily challenging period,” Tim
Solso, chairman and chief executive, said in a statement.Cummins reported a fourth-quarter profit of $89 million, or
45 cents a share, down from $198 million, or $1 a share, a year
earlier.Sales fell 6 percent to $3.29 billion.
Analysts on average expected a profit of 41 cents a share,
according to Reuters Estimates.
Layoffs should total about 800, the company said.
Cummins Engine earnings release here. From the release:
Cummins expects sales in 2009 to be approximately 20 percent lower than 2008, and to earn an EBIT margin of 6.5 percent of sales, excluding restructuring costs associated with the actions announced in the first quarter of 2009.
Sales are forecast to drop across all business segments, with the largest decline expected to come from the Components and Engine segments. All business segments, however, are expected to be profitable in 2009 and the Company will continue to aggressively reduce costs while investing in key growth opportunities.
Well, they’re keeping their chins up. Noteworthy tidbits from the release: sales to Chrysler for its pickup trucks are down 34 percent and sales to RV manufacturers are off 72 percent.
More on Cummins at Finviz.
Assessing Caterpillar’s conference call for Q4/08 earnings
Caterpillar’s earnings call was remarkable in the degree to which the record-breaking sales of last year were utterly irrelevant to the world we live in this year. Cat raced along fine for three quarters, then took a spectacular spill in the fourth. (Think “agony of defeat” ski jumper and remember — he survived).
Caterpillar CEO Jim Owens described a “seismic adjustment” in revenues for 2009. Cat was hoping for $50 billion; now it’ll settle for $36-44B. Caterpillar’s promise to deliver $2.50 a share in earnings — a 50 percent haircut from ’08 — this year drew some skeptical questioning from the analysts, but Owens and company assured them the “redundancy” operations (if they got no work for you, you’re redundant; and unemployed) of the first quarter, combined with reductions in prices for steel, copper and other essentials, should help get costs in line with sales volume.
Speaking of commodities, there’s a lot riding on how much miners can earn digging them out of the ground. Mike DeWalt, director of investor relations, noted that since the end of the third quarter, “copper, which is a bellwether commodity for us, is down about 50%; oil was off about 60%; and natural gas prices were down about a third.”
Owens highlighted the uncertainty that will affect whether Cat earns $2.50 a share: “… we just need to see where the bottom of this cycle is going to end up. It’s difficult to assess. Is oil going to be $30 or $80 at the end of the year? Is copper going to be $0.75 or $2.50 at the end of the year?” Cat expects copper to be in the $1.10 per pound range, which is below the price miners need to launch new projects.
What about inventories?
“We pretty much hit a wall in December,” DeWalt said. Things got bad enough that Cat called up its dealers and asked them to call off any orders that weren’t a sure thing. That means Cat won’t be heading in to the depths of recession with so many parking lots full of tractors nobody wants.
And what about the legendary order backlogs of the mega mining trucks? Owens says the three-year waiting list has helped, but things are pretty ugly across the mining sector. “The volatility in the orders of people slicing about or canceling orders has been very high,” Owens said. The order backlog “still looks reasonably good for this year,” he said, though some orders are likely to be canceled.
Cat’s pitch is that when the mining sector recovers, it’s going to have to do something about the 10-year average age of its fleet. Like, buy a bunch of new trucks, tractors and loaders.
What about cap-ex?
While Caterpillar plans to slash capital expenditures by 40 percent, it’s sticking to its guns about getting the North Little Rock, Arkansas, motor grader plant up and running. Same with the engine plant in Seguin, Texas.
Talking debt
Cat’s debt ratio swelled to 57 percent last year, which triggered some analyst consternation, but Group President Ed Rapp promised to get it back down to its historical range of 35 or so in the next year. Where the excess came from: 11 percent to fund the pension plan; 3 percent to load up on extra cash to ride out the financial crises; and 7 percent to integrate Cat Japan. Subtract those factors and Cat’s back to normal, he says.
Stimulus thoughts:
Mike DeWalt is hoping for “a good thoughtful package” in the United States and China. He added that a number of the emerging markets have relatively low inflation and stronger balance sheets than they’ve ever had heading into a major recession.
“If we just get the financial market to stabilize globally, this economy wants to grow and we, Caterpillar, I think are exceptionally well positioned.”
I’ve skipped some details on Cat Financial that are a bit out of my league. Nothing set off any car alarms, though.
Cat’s stock took a proper pummeling Monday, and there’s more in store, no doubt. Still, the five-years-down-the-road outlook is that when the economy recovers, commodities will again be in short supply and big yellow trucks, tractors and engines will be needed to get them to market. Doesn’t have to be Cat supplying all that machinery, but I suspect most folks who already own Cat equipment will buy more when their current supply wears out.
Quick note about Cat’s conference call
I’m going to wait till the text transcript is posted before I post any thoughts on Caterpillar’s conference call. Most of the chatter was covered in the earnings release but there were a few interesting insights on mining, commodities and Cat’s finance arm.
One thing I’m still unclear on: Caterpillar’s “trough plan” — its playbook for earning a profit when the business goes bad — envisions a profit of $2.50 per share on revenues of $36 to $44 billion. Cat presumably based its trough model on previous downturns, but it also expects the worst economic environment of the post World War II era. My notes of the call have one of the Cat brass saying $2.50 would be double the EPS of the 2002 downturn, one of the mildest recessions of the past 50 years.
How can Cat plausibly expect twice the EPS from 2002 when things look more like 1982? Stay tuned, and I’ll see what I can find out.
Caterpillar Inc. earnings: Wonderful 2008; woeful 2009
Caterpillar Inc. is a assuming a 20 percent reduction in sales for 2009, and 50-plus percent reduction in profits. Perhaps the scariest thing in this morning’s earnings report:
We expect 2009 will be the weakest year for economic growth in the postwar period. We are expecting recessionary conditions to persist in most of the world throughout the year, with no growth in the world economy.
So, don’t get your hopes up.
The other day I posted a list of bullet points to look for in this morning’s earnings release. Let’s revisit:
- Access to financing: Caterpillar had buyers for a bunch of bonds in December, and its credit rating ensures it has access to as much financing as it may need.
- Order backlog: Plunged in the fourth quarter and ended the year at $14.7 billion, well below the year-end 2007 level of $17.8 billion. Demand for giant mining trucks is easing, but customers are primarily delaying orders rather than canceling them.
- Commodities: Prices are down across the board, which is pinching much of Cat’s customer base. Steel prices hurt Cat last year but presumably that’ll be less of an issue this year.
- Labor: 20,000 jobs gone by the end of the first quarter of 2009.
- Infrastructure: Cat called stimulus plans a step in the right direction, but didn’t expect to see much improvement to Cat’s bottom line until late in 2009.
- Green energy: Didn’t see anything here, but it could come up in the conference call.
I’m at least somewhat disappointed that Caterpillar didn’t issue an earnings warning before this morning. When you expect your profits to fall by over half in the next year, investors deserve a heads-up.
A few quotes from the headlines:
“The results were worse than we were even anticipating, and we had lowered our expectations considerably,” Kristine Kubacki, a St. Louis-based analyst with Avondale Partners LLC, said in an interview. Comments about order cancellations in December “were particularly worrisome,” she said.
Note: Cat says it requested that dealers cancel some orders to avoid inventory build-up.
As the financial crisis has continued to worsen in recent months, Caterpillar’s ability to issue corporate bonds has been hurt. Its finance arm has been driven to offer sharply higher yields on recent bond sales to lure investors.
At least Caterpillar is finding buyers besides the U.S. government.
—
Disclosure: I own no shares of Caterpillar Inc.
Drill-down on Caterpillar’s 4Q/08 earnings report
Highlights cut ‘n’ pasted from today’s Caterpillar earnings release:
2008 sales:
- Machinery and engines: $48 billion in 2008, up 14 percent from 2007.
- Financial products: $3.28 billion in 2008, up 9 percent from 2007.
- Machines sales: $31.804 billion, up 12 percent from 2007
- Engines sales: $16.240 billion, up 19 percent from 2007
Q1 2009 outlook:
- While we expect the full year of 2009 to be very challenging, profit in the first half, and particularly the first quarter, will be under severe pressure. In fact, a first-quarter loss is possible.
Employment:
- Voluntary and involuntary separations and layoffs of about 4,000 full-time production employees. Depending on business conditions, more layoffs may be required as the year unfolds.
- Sharp declines in overtime work.
- Several facilities have shortened workweeks, and thousands of employees have been, or will be, affected by temporary layoffs and full and partial plant shutdowns.
- Elimination of almost 8,000 temporary, contract and agency workers.
- Voluntary separations of about 2,500 support and management employees.
- Additional layoffs or separations of as many as 5,000 support and management employees.
- Hiring freezes and suspension of salary increases for most support and management employees.
Q&A highlights
- Q2: What’s your forecast for key commodity prices in 2009?
- A: We project West Texas Intermediate crude oil will average a little more than $40 per barrel, down from $100 in 2008. Copper prices should average about $1.10 per pound, compared to $3.15 in 2008. Both price forecasts are below prices that we believe would be attractive to launch new projects.
- Q4: How do you expect the U.S. stimulus package to impact Caterpillar?
- A: Our initial assessment is that the package might have up to $150 billion in infrastructure-related spending, spread over a two-year period. If enacted quickly, perhaps $50 billion could be spent in 2009. That expenditure would represent about 5 percent of total U.S. construction spending in 2008 and would likely require some increase in equipment purchases to handle the added work in addition to increased utilization of the existing machine population. Other measures in the package, such as tax cuts and actions to improve the housing industry, could indirectly benefit construction.
- Q13: Outside of Cat Financial, what has been Caterpillar’s recent experience with debt markets? Do you have access to capital?
- A: The problems in the credit markets have had limited impact on Caterpillar Inc. due to our strong credit rating. We have been able to maintain normal operations and fund our needs. Caterpillar Inc. successfully issued $1.5 billion of long-term debt in early December. The offering generated strong investor demand. There also is strong demand for our commercial paper and we have benefited from very low interest rates on commercial paper.
—
Disclosure: I do not own shares of Caterpillar.
What I’m sensing about Monday’s earnings report
Interest in Caterpillar’s earnings report has juiced my page-view counts to all-time highs (granted, all-time is only six weeks and starts from a zero base), and it’s also generated a fair amount of buzz online. Stocktwits had a big spurt in the past three days after a comparatively quiet three weeks before that. Sample posting:
With $CAT probably not making earnings Monday, is it good time to buy when it gets crushed?
My hunch is a lot of people think Cat will get spanked hard tomorrow — which could be bullish if you’re a daring contrarian who can get in and out fast enough. There’s often a lot money to be made zigging when the herd zags. But there’s always the potential for getting trampled. This long look at what’s coming up this week across the market shows we’re rolling into the busiest week of the earnings season. Couple thoughts:
- We’ve just come off a train-wreck fourth quarter that will pummel cat and dog alike. How does this translate into better earnings per share, the fundamental driver of stock prices?
- How long would you want to be in a market where even Microsoft — whose software is installed in nine out of every 10 personal computers on the planet — is offering no guidance for 2009?
The bullish case for Caterpillar is not that Obama’s billions will sell more tractors. I think it’s more anthropological: what sets our species apart is our ability to make ever more complex tools, and to build ever-more complex societies. Caterpillar builds the tools that enables these societies to evolve.
Of course, lots of companies build tractors, engines and machinery. Caterpillar dominates most of the markets it operates in because its tools help people build things efficiently and profitably. Doesn’t mean Cat will always be able to do this, but for now, Cat is on top of the heap and it has enough people who recall the near-death experience of the early 1980s to know there is no choice but to cling to their competitive edge with everything they’ve got.
As for Monday, I cannot help but agree that Cat seems to be in for a body blow, and that the rest of earnings season may pound it lower over the next few weeks. Yahoo Finance’s message board traffic is dominated by a guy who posts under the handle Benwaw58, who thinks Cat will most likely get down around 30, give or take a point or two, before a sustained rally kicks in. That’s down another 14 percent from last Friday, so it won’t be pretty. He’s watched the stock since the 1970s so he has a good grasp of its ups and downs, including those dark days of the early Reagan administration.
Perhaps the best clue on what happens tomorrow lies in the past: read the transcript of Cat’s third-quarter earnings call and ask yourself what has changed.
Caterpillar Q4/08 earnings preview
Caterpillar announces earnings before the opening bell Monday morning. The hot money doesn’t care what happened last year: it wants to know what’s coming. The lesson of CNH last week was harrowing: 2008 was on balance a pretty good year, but lack of guidance on 2009 got the company’s shares crushed by over a third in one day. I can’t imagine Cat getting hit that hard because there’s too much bullish sentiment on the company’s long-term prospects, but there should be some excitement.
The low-down
Cat’s fourth-quarter earnings for 2008 are expected to fall between $1.03 and $1.42 per share on revenue between $11.75 billion and 13.41. (Source: SeekingAlpha).
Caterpillar sees FY08 EPS of about $6.00 vs. consensus $5.89, and FY08 revenue topping $50B vs. consensus $51.25B. The company also stated FY09 economic outlook is “extremely uncertain.” The company believes its current outlook for 2009 calls for sales and revenues to be about flat with its FY08 results.
Money quote from this Associated Press report at Forbes.com:
“It’s not going to be a pretty quarter, and the guidance is likely to be ugly,” said Longbow Research analyst Eli Lustgarten. “You’re talking about a pretty substantial double-digit decline in 2009.”
Cat’s results will be announced at 6:30 a.m. Monday CST. The conference call is at 10 a.m. CST; go here for the Web cast (leave yourself 15 minutes for software installation and registration). Or you can dial in at 877-216-8554 (U.S.) or 973-528-0009 (international). Entry code: 5621. Go here if you missed the call and want to hear a replay.
What to listen for:
- Access to financing: Buyers pay cash for a large chunk of Cat’s order book (up to half in some construction-machinery categories, as I recall) , but the rest must borrow. With credit crunch fears returning in the past couple weeks, this’ll be first on the market’s mind.
- Order backlog: Cat had a nice order backlog last year, particularly on huge off-highway mining trucks (one of the key rationales for the North Little Rock plant was to make room in Decatur to build more off-highway trucks). How many cancellations is Cat getting?
- Exchange rates: Cat adores cheap steel and non-union wages, but above all it craves a cheap dollar. What’s Cat’s currency outlook?
- Commodities: Cheap steel would be good for Cat, obviously, but low prices for everything else — minerals, crops, oil — hurt demand for Cat equipment, and demand for steel, so low steel prices are probably more bearish than bullish for Cat.
- Labor: Does Caterpillar expect to fire people this year? What’s the company’s outlook on health care expenditures and pension funding?
- Infrastructure: How much does Caterpillar, which appears in a far better position to know, expect to benefit from “rescue” plans in the U.S. and China?
- Green energy: I know it’s kind of a buzzword and possibly the next big bubble, but so-called “alternative” energy will require machinery to implement. How does Cat plan to surf this wave?
Earnings announcements are flooding the markets next week. Here’s a look at what’s coming.
I may still be asleep when Cat’s numbers go public (4:30 a.m. PST!), but I do plan to listen in on the conference call and report back here. Should be some fun. Remember: one-day moves are irrelevant in the grand scheme of things.
I’m reminded of the Chinese curse: “May you live in interesting times.”
Bleak outlook for construction and heavy equipment
ENR.com reports that industrial firms are writing off 2009 and hoping for better days next year.
“I think any kind of turnaround is going to be slow,” says Rich Carlson, vice president of Minnesota-based Carlson Tractor and Equipment Co. His company had a poor 2008, and 2009 is not looking so good, either. “I think the hope is that it doesn’t get any worse,” he adds.
Gerry Couch, president of King of Prussia, Pa.-based Modern Equipment Sales and Rental, is supportive of the proposed stimulus package but has questions about how it will be implemented. “I do believe [the stimulus] will make a difference, but not in 2009,” he says.
Meanwhile, Bloomberg foresees an ugly Monday when Caterpillar reports its earnings. Between the lines you can read a suggestion that Cat’s GDP forecast from the third quarter was a bit optimistic.
Caterpillar Chief Executive Officer Jim Owens, who holds a Ph.D in economics from North Carolina State University, suggested he may update the company’s economic forecast next week that he gave in October. Owens gave a tentative estimate of less than 2.5 percent gross domestic product growth for 2009, according to the company’s third-quarter earnings release.
“The first two quarters are going to be rough,” said Bill Batcheller, who helps manage $650 million in assets, including Deere and Caterpillar shares, at Butler Wick & Co. in Youngstown, Ohio.
“Still, if Caterpillar sticks with the 2.5 percent estimate they gave for GDP growth, that implies they expect a really strong second half,” Batcheller said.
It’s going to be fun Monday: either Cat surprises to the upside and squashes all the short sellers, or surprises to the downside and squashes everybody else. Or a third option: Cat successfully manages Wall Street’s expectations better than those poor blighters at CNH, whose stock got blasted by over a third yesterday, and not much happens and we keep muddling along. The latter will be the least sexy of the bunch, but might be preferable to the whiplash collars the other results induce.
Komatsu slashes earnings forecast
Komatsu, which competes with the world’s No.1 Caterpillar Inc., said it now saw an operating profit of 200 billion yen ($2.3 billion) for the year to March 2009, down from its previous profit estimate of 300 billion yen.
That would be down 40 percent from the previous year and lag the consensus estimate in a poll of 16 analysts by Reuters Estimates of 273.7 billion yen.
“This is not good for its stock price,” Hidehiko Hoshino, an analyst at UBS, said.
“The market will focus on a possible sharp deterioration in profit in the next business year and a lack of visibility in its earnings environment.”
This is the main reason Caterpillar’s stock got beat up at the open, though you have to ask yourself: with Cat in the same boat as everyone else and earnings to be announced before the bell Monday, would you want to be holding Cat over the weekend?
(Of course all wise investors tune out day-to-day ticks, but what fun is being wise?)