Caterpillar Inc. Earnings and Outlook Indicate Big Trouble Ahead

By Markets Fool.com

In a major blow to investors' hopes, Caterpillar reported dismal fourth-quarter numbers this morning, missing Street estimates by a gaping margin. Worse yet, the company delivered a shockingly weak outlook for 2015, sending its stock crashing -- it's down 7% today. It looks like Caterpillar is in serious trouble.

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What's hurting Caterpillar

A sluggish mining industry isn't the only headwind Caterpillar is facing. As revenue from the company's resource industries (mining) division slipped 10% year over year during the fourth quarter, its construction industries division reported a 9% drop in sales. Except for North America, construction-equipment sales declined in every market. As CEO Doug Oberhelman explained: "While our construction sales were up in 2014, the industry is still well below prior peaks in every major region due to relatively weak economic growth for most of the world."

Can Caterpillar dig itself out of the mess? Source: Caterpillar.

The only bright spot was Caterpillar's energy and transportation (E&T) business, which saw sales climb 11% during the fourth quarter. Unfortunately, it wasn't enough to save the company's profits from tanking.

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Outlook that spells trouble

While analysts were expecting Caterpillar to earn $1.55 a share for the fourth quarter, it fell short of estimates by nearly 20%, generating only about $1.23 in earnings per share. As it turns out, higher manufacturing costs and selling, general, and administrative expenses weighed heavily on the company's bottom line: Its Q4 operating profit slumped 27% year over year. Investors who were pinning hopes on Caterpillar's ongoing cost-reduction program, which includes layoff and restructuring, to boost the company's margins were left in the lurch.

What's worrisome is that Caterpillar's outlook for 2015 reveals bigger challenges ahead. The company expects to generate revenue worth about $50 billion in 2015 and earn only about $4.60 a share. That represents a big decline from the $55.2 billion in revenue and $5.88 profit per share reported for 2014. Tumbling oil prices are largely to blame for this weak forecast.

Oil price: The big burden

As I highlighted in a recent article, lower oil prices could send Caterpillar's energy and transportation division sales tumbling, since oil and gas is among its primary end markets. Oberhelman confirmed the fears during the fourth-quarter earnings release: "The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook. Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world."

Simply put, a lower oil price could dent the prospects of Caterpillar's largest and most profitable business, E&T, even as the company's other businesses struggle to grow. Caterpillar even lowered its 2015 sales expectations for mining and construction equipment. That's the last thing investors wanted to hear.

What you should do now

It's simple: Brace for a choppy ride. Until a few months back, a mining slowdown was considered the biggest headwind for the company. But things have changed dramatically now, with oil prices crashing and global construction markets slowing down. Caterpillar's 2015 outlook gives you a good idea of how painful the year ahead could be, and it'll likely be a long wait before you see the company's profits rise again.

The article Caterpillar Inc. Earnings and Outlook Indicate Big Trouble Ahead originally appeared on Fool.com.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. 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.