Time to Hit the Brakes on Caterpillar's Rally -- Ahead of the Tape

By Steven Russolillo Features Dow Jones Newswires

Caterpillar Inc.'s stock has climbed out of a deep hole. Considering the machinery company's earnings, revenue and legal outlook, shareholders might want to temper their enthusiasm.

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Shares surged 36% last year, making it the best performer in the Dow Jones Industrial Average. They have tacked on another 4% in 2017 to date on hopes that President Donald Trump will increase infrastructure spending. The gains come even as Caterpillar has been stung by big bets on resources, agriculture and construction markets, which were hurt by the global commodities slump and mining-sector slowdown.

Analysts, who have repeatedly cut earnings forecasts, expect revenue to drop in 2017 for a fifth consecutive year. And not only does Caterpillar face top- and bottom-line weakness, but it is now grappling with a federal criminal investigation, which should be top of mind for investors in Tuesday's earnings report.

Before that, though, the headline numbers aren't expected to be anything to celebrate, either. Analysts polled by FactSet estimate first-quarter earnings of 63 cents a share, down four cents from a year earlier. For the full year, analysts expect earnings of $3.25 a share. Two years ago, the forecast for the same period was $5.45.

Revenue is expected to have decreased 2.1% to $9.3 billion. Caterpillar has missed analysts' sales forecasts in six of the past seven quarters.

What could sway the stock more in the near term is any additional information related to the criminal investigation. Federal agents raided three of Caterpillar's facilities in Illinois last month, with questions swirling about the company's offshore tax strategy involving a Swiss subsidiary and its export filings with the Commerce Department. The company hasn't offered many details of the financial implications. It has been contesting the roughly $2 billion in taxes and penalties sought by the Internal Revenue Service.

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Granted, the news isn't all bad; Caterpillar on Monday said its world-wide machine retail sales rose 1% year over year during the three-month stretch ended in March, the first increase since November 2012. That suggests that the worst of Caterpillar's deep slump in recent years might be over, raising hope that its mining, construction and energy markets might finally be poised for a rebound.

But, as with other cyclical companies, the time to buy those stocks usually isn't when results turn positive but when they are bottoming. That might have been the case with Caterpillar, too.

The stock's sharp rally since the beginning of 2016 has now made it fairly expensive. In February, its debt-adjusted market value hit a high of 2.4 times forward sales projections, its highest at least since 1994, according to FactSet. It currently sits above 2 times, which has been the case only 5% of the time over that period.

Caterpillar's stock is riding a banner-year performance. Don't expect a repeat in 2017.

(END) Dow Jones Newswires

April 24, 2017 14:33 ET (18:33 GMT)