A heavy equipment operator walks between Caterpillar earth moving equipment at a road construction site on April 24, 2006 near Joliet, Ill.Scott Olson
Caterpillar Inc. is trying really hard to warn investors about the tough slog that awaits the company in 2017, and they just can't be bothered.
The $57-billion manufacturer on Thursday said its sales would likely decline for a fifth straight year as miners continue to hold off on spending and the availability of used construction equipment undermines demand for new products in North America. Caterpillar's revenue guidance implies a drop of about 2.7 per cent at the midpoint to $37.5-billion, which fell short of analysts' expectations and would represent the company's lowest sales figure since 2009. Investors sent the stock down almost 2 per cent at one point but then got over it and Caterpillar was essentially flat for most of the morning in New York, maintaining a 17-per-cent surge in the wake of Donald Trump's victory in the U.S. presidential election.
I mean, what more does Caterpillar have to say?
In October, I argued that CEO Doug Oberhelman's decision to step down was a warning sign that the promise of a bottoming out in mining-related sales wouldn't necessarily translate into a revenue recovery anytime soon. That same month, Caterpillar cut its 2016 revenue guidance amid a glut of used and idled equipment and said sluggish sales would persist in 2017. In November, a company executive said in the best-case scenario, it could see an impact from Trump's promised infrastructure investments by the end of 2017 (on Thursday, it said that's more likely a 2018 event). In December, Caterpillar executives indicated that analysts' expectations for $38 billion in 2017 sales would at best represent the midpoint of its guidance, calling the forecast "too optimistic."
Moody's Investors Service even got in on the game last month as it lowered Caterpillar's credit rating by one level, noting the unlikelihood of a meaningful recovery in construction and mining markets until 2018 and that new equipment purchases could be even further out. The ratings company also took a wait-and-see approach on the effectiveness of Caterpillar's efforts to cut costs and improve profitability.
Analysts slightly rolled back their revenue estimates in the wake of Caterpillar's December comments, but in recent weeks, they've been upping their numbers. Going into Thursday's earnings update the average 2017 sales expectation was about $38.1-billion -- back above what Caterpillar said was reasonable.
If analysts are too optimistic, investors are living in la-la land. Caterpillar shares actually climbed 0.7 per cent after its words of caution in December. Its gains so far this year are nearly double that of a broader basket of industrial companies. As of Thursday, Caterpillar was trading about 5 per cent above analysts' average price target.
This a clear test case of what happens when investors price in all the potential positives of a Trump administration, whether infrastructure spending or tax reform, and few of the potential negatives.
Caterpillar said a big reason behind its low revenue guidance was the surge in the U.S. dollar in the wake of Mr. Trump's election. It's a matter of debate what will happen to the dollar over the course of the next few years, in part because no one's entirely sure what Mr. Trump is going to do. While Mr. Trump has griped about the strength of the greenback, his ambitions to grow the U.S. economy, along with proposals for cash repatriation, tax cuts and a border levy would seem to be bullish for the dollar, at least in the short term, creating more headaches for companies such as Caterpillar that export their goods overseas. There's also the question of what an America First energy policy under Trump might mean for oil prices and global demand.
Bottom line: There's a strong possibility of negative surprises at Caterpillar over the course of 2017 and investors are going to be caught flat-footed when they come.
There were some positive signs in Caterpillar's earnings report, including an uptick in mining-parts sales. But there were also a lot of "ifs" and it's hard to justify a rich valuation for that. Hear that, investors?
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Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.