This "look-ahead" post discusses how I came up with an estimate for Caterpillar's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available on January 29, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before we get into the details, let's take a step back and start with background information about Caterpillar.
Caterpillar is a leading manufacturer and servicer of machinery for construction, mining, energy production, and transportation. The company also has finance subsidiaries that help customers and dealers purchase and lease Caterpillar and certain other products. Demand for Caterpillar's products tends to vary as economic conditions strengthen and weaken and commodity prices rise and fall. Not surprisingly, the slowdown induced by COVID-19 took a significant bite out of Caterpillar's sales in 2020. Prospects for 2021 seem better.
With a market value of about $100 billion on a fully diluted basis, Caterpillar is included in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 indices.
Caterpillar recorded profits of $3 billion on revenue of $44 billion during the last year. In the quarter that ended on 30 September 2020, Caterpillar earned $1.34 per share (excluding certain items), which significantly beat the $1.17 Wall Street consensus forecast. See https://tinyurl.com/y383pnzo for Caterpillar's most recent quarterly report.
Revenue in the September quarter totaled $9.9 billion, 23% less than last year's $12.8 billion. The Construction Industries business was responsible for 41% of overall revenue, and this unit's revenue fell by 23.3% compared to the year-earlier result. The Resource Industries business contributed 18% of revenue, and this unit's revenue fell by 21.4%. The Energy & Transportation unit supplied 42% of revenue, and the amount fell by 23.7%.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Caterpillar's management communicated their expectations for the December 2020 quarter last October. This is a start, but it's not specific enough for my purposes.
A data point that may not carry much weight in this unusual year is that Caterpillar's fourth-quarter revenues in recent years have, on average, been about 5.5 percent higher than revenue in the preceding quarter.
The following baseline Income Statement tries to take into account the factors mentioned above and other historical results. I wouldn't say I have a whole lot of confidence in these figures, but they seem reasonable based on the information I have. Earnings are estimated at $556 million ($1.02 per share).
Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.
#cat #caterpillar #lookahead #gcfr #gcfr2 #gauges
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