Throwing Some Cold Water on Caterpillar’s Quarterly Earnings
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There has been quite the bullish sentiment surrounding the second quarter results from Caterpillar (NYSE: CAT). Revenues saw a 14% jump compared to Q2 of last year, and a 40% jump in profit over the same time span. Number like these would certainly make people jump right onto these results and ride the stock as it soars, but there are three things that are concerning me:
1) Cash is burning up…fast!
Despite the big jump in revenue between this qurter and the last quarter year over year, it seems a bit discouraging that the company has dropped its cash position by 50% over this time frame ($10.7 billion to $5.1 billion). Now, I will concede that cash has slightly risen since last quarter ($2.8 billion to $5.1 billion), but to see such a major drop in cash is still going to raise an eyebrow for me.
2) Inventories are outpacing sales by a mile
At first glance, a 14% growth rate in revenue year-over-year seems fantastic, but compare that to the 34% growth of inventories they saw in the same time period! Those rose-colored growth numbers don’t seem as good when inventory is growing at double that pace. I could be more forgiving if there were some seasonal flux in inventories. Based on the numbers, though, it appears that either a) Caterpillar is anticipating a large demand for product in the upcoming quarters, or
Source Yahoo! finance and Caterpillar Q2 2012 earnings report
b) They really need to consider ramping down production to clear the warehouses.
3) Cash-to-Debt rates are at an alarming rate
Obviously, with such a large drop in cash, it is expected that the cash-to-debt will rise. I don't want to appear to hammer them twice for the same problem, but there was a 5% uptick in total long-term debt on top of that burning pile of Benjamins. I would have expected that some of that cash had gone to paying down the total debt load, but by the end of the quarter we ended up with a 55% percent drop in cash-to-debt ratio.
Add this all up and those great quarterly earnings for the company are not looking as solid as they once did. Is this big ramp-up in inventories a tell tale sign that they expect a brighter future? Less than probable. Caterpillar even announced in their 2012 outlook that they have lowered the top end of their estimates for the rest of the year, mostly coming from the slowing demand in both Europe and China. I would also be hesitant to go in too big on them when company insiders have both dropped 10.7% of their shares within the company and increased the total number of shares within the company in the past 6 months.
If looking to make a play into the heavy equipment industry, I would be looking more at Deere & Co. (NYSE: DE). They have been seeing very similar growth numbers in terms of both revenue and earnings, but they are not taking the hit in the cash department and their debt numbers are increasing at a lower level. They also have a more diversified portfolio of products reaching a much wider customer base (I know I have a few friends who sport the green hats).
If the trends that were predicted in Caterpillar’s earnings report are correct, we should be seeing similar results when when other big hitters in the industry like CNH Global and Joy Global release their earnings in the upcoming weeks. If these companies are seeing that similar downward trend in demand for the remaining of 2012, then perhaps some of those fishy numbers in Caterpillar’s books might come back to bite them.
TylerCrowe has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.