Caterpillar's First Quarter Profit Was More Than Twice What Analysts Had Forecast

By Motley Fool Staff Markets Fool.com

In this segment fromMarketFoolery, host Chris Hill andMillion Dollar Portfolio's Matt Argersingertalk about what's behind construction and heavy equipment giant Caterpillar's (NYSE: CAT) impressive quarterly report. Yes, the fundamentals and broader business are all humming along, but it's also important to recognize what came before. The business has been undergoing expensive multiyear restructurings and dealing with issues in China -- and those aren't entirely in the rearview mirror yet.

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A full transcript follows the video.

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This video was recorded on April 25, 2017.

Chris Hill:Let'stalk about one company that's helping topush the market up today, certainlypushing up theDow,becauseCaterpillaris one of the Dow 30 stocks.Caterpillar's first-quarter report wasfantastic. This is not a beat-by-a-penny situation. Their profits came in more than double what Wall Street was expecting, their overall revenue was solidly higher, they raised guidance for the full fiscal year. And the stock, this isone of those tried-and-true, steady blue chipperformers, their stock is up nearly 7% this morning. I get that this was a great quarter,but I'm assuming this is what you were referring to when you were like, wow, 7%? That seems lofty for a company like Caterpillar.

Matt Argersinger:
It does. Theearnings picture looks great for them. Butthat's because Caterpillar, like a lot of companies,has been doing a lot of restructuring lately. If you look at Caterpillar,for example, they'vehad restructuring charges every quarter going back to the end of 2012. Just last year, they had about $700 million ofrestructuring costs. This is just them shuttering old facilities, moving a plant somewhere else, or shifting capitalfrom one segment to another, and shutting down operations.

Hill:
And that wholeproblem they had in China.

Argersinger:
Thatthat whole problem they had in China. Theproblem with me, though, is that when I see a company that restructures this often, I don't believemanagement when management comes out and says, "These are one-timeexpenses that were taking out of our earnings. Here's our real earnings." Thatmakes me very uncomfortable. With acompany like Caterpillar that's doing that, I tend to count those charges. Andif you do, the earnings per share don't look nearly as good. Then,if you just look at revenue growth overall, it's up 4%. I know they saw somestrength in the resource business and the energy transportation business. Thosesegments have really struggledover the past few years with commodity prices and oil prices. But, the fact that those are bouncing back is a good part of the story. I would just say, be very careful of Caterpillar. Wetalked about lofty valuations. You have a company growing revenue 4%, gave greatguidance for this coming year, butis this a company that should trade at 32 times earnings? Those earnings,by the way, are the adjusted earnings. They'realreadyrestructuring more this year, and they'retaking those out of their guidance.

Hill:
Ididn't realize the multiple was that high.

Argersinger:
32 times! That, to me,I think Caterpillar is a great company. It's an industry bellwether, it'svery diversified, butI'm not paying that multiple for a company like this.

Hill:
Andyou hit on a key word there, which I think is part of a small sliver of theenthusiasm that we're seeing today, and that's bellwether. I think any time --Caterpillar is on that shortlist of large companies that,when they do well,it's like a Rorschach test, but aRorschach test where every institutional investor seessomething positive. When Caterpillar puts upa really good quarter, I think you have a lot of people on Wall Street saying, "Oh, this meansgreat things for housing,this means great things for infrastructure."

Argersinger:
"Energy is great,mining is coming back," yeah,all those things, you're right.

Chris Hill has no position in any stocks mentioned. Matthew Argersinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.