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Caterpillar (CAT) Q2 Earnings & Revenues Surpass Estimates

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Caterpillar Inc. (CAT - Free Report) reported second-quarter 2020 adjusted earnings per share of $1.03, which beat the Zacks Consensus Estimate of $1.77 by a margin of 56%. However, the bottom line plunged 64% from the prior-year quarter’s adjusted earnings per share of $2.83.

The disappointing performance can primarily owing to lower demand across all segments and geographies. The company also did not provide any guidance for 2020 and stated that results for the remainder of the year will bear the impact of the coronavirus pandemic.

Including pre-tax remeasurement losses of 19 cents per share resulting from the settlements of pension obligations, Caterpillar’s earnings per share came was 84 cents in second-quarter 2020, reflecting a decline of 70% from the prior-year quarter figure of $2.83.

Caterpillar Inc. Price, Consensus and EPS Surprise Caterpillar Inc. Price, Consensus and EPS Surprise

Low Demand a Drag on Revenues

The company’s second-quarter revenues of $10 billion surpassed the Zacks Consensus Estimate of $9.2 billion. Nevertheless, the top line figure suffered a decline of 31% on lower sales volume. This was mainly due to low end-user demand amid the coronavirus pandemic and the impact from changes in dealer inventories. Dealers lowered machine and engine inventories about $1.4 billion during the reported quarter against an increase of about $500 million during the prior-year quarter.

The company witnessed decline in sales across the board. Sales in Latin America plunged 41% followed by a decline of 40% in North America. Sales in Asia Pacific and EAME were both down 17%.

Margins Dip on Lower Sales Volume

In second-quarter 2020, cost of sales decreased 28% year over year to $7.1 billion. Manufacturing costs were favorable aided by lower period manufacturing costs. Gross profit contracted 36% to $2.9 billion on lower sales. Gross margin was 28.8% in the reported quarter, down from 31.1% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 10% to around $1.18 billion. Research and development (R&D) expenses declined 23% to $341 million from the prior-year quarter figure of $441 million. Both SG&A and R&D expenses in the quarter benefited from reduced short-term incentive compensation expense and other cost reductions related to lower sales volumes.

Operating profit in the quarter was $784 million, marking a slump of 65% from the prior-year quarter.  Lower sales volume and unfavorable price realization, partially offset by favorable manufacturing costs and reduced SG&A and R&D expenses led to lower operating profits in the quarter. Operating margin was 7.8% in the reported quarter, down 750 basis points from the prior-year quarter.

Segment Performances Dented By Weak Demand

Machinery and Energy & Transportation (ME&T) sales tanked 32% year over year to $9.3 billion. Construction Industries sales slumped 37% year over year to $4 billion owing to lower sales volumes on account of lower end-user demand and the impact from changes in dealer inventories.

Sales at Resource Industries declined 35% year over year to around $1.8 billion lower sales volume, owing to changes in dealer inventories and lower end-user demand. Demand for equipment supporting non-residential construction and quarry and aggregates was impacted in the quarter and spending on mining equipment was muted due to lower commodity prices. Sales of Energy & Transportation segment in the quarter were $4.1 billion, reflecting a decline of 24% from the prior-year quarter on account of lower sales across all applications.

The ME&T segment reported operating profit of $749 million, reflecting a slump of 66% from the year-ago quarter. The Resource Industries segment’s operating profit fell 68% year over year to $152 million in second-quarter 2020. Construction Industries segment’s profit witnessed a year-over-year decrease of 58% to $518 million. The Energy & Transportation segment’s operating profit declined 30% year over year to $624 million.

Financial Products’ revenues went down 10% to $687 million from the prior-year quarter. Financial Products' profits were $110 million in the reported quarter, down 23% from $143 million in the year-ago quarter.

Cash Position

For the first half of 2020, operating cash flow was $2.5 billion compared with $3.7 billion in the prior-year comparable period. Caterpillar ended second-quarter 2020 with cash and short-term investments of $8.8 billion and available liquidity sources of $18.5 billion. In July, Cat Financial issued $1.5 billion of new three-year and 18-month medium-term notes to supplement its liquidity position.

Other Updates

Caterpillar stated that nearly all of its primary production facilities are operational currently. It has been taking actions to reduce costs, which include cutting down discretionary expenses, and suspending 2020 base salary increases and short-term incentive compensation plans for many employees and all senior executives. This will help sustain margins amid a weak demand backdrop. The company remains focused on making continued investment in services and expanded offerings, which are crucial to its strategy for profitable growth.

Earlier, on Mar 26, 2020 Caterpillar had withdrawn guidance for 2020 due to the uncertainty related to the impact of the pandemic. The company has not provided any guidance with this quarterly release as well.  However, it cautioned that its financial results for the remainder of 2020 will bear the impact of the persistent global economic uncertainty due to the COVID-19 pandemic.

Price Performance

Over the past three months, Caterpillar stock has gained 23.3%, compared with the industry’s rally of 27.0%.

Zacks Rank & Stocks to Consider

Caterpillar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. (SLGN - Free Report) , IIVI Incorporated (IIVI - Free Report) and Energous Corporation (WATT - Free Report) . While Silgan and IIVI sport a Zacks Rank #1 (Strong Buy), Energous carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 28.7% for the current year. The company’s shares have appreciated 13% in the past three months.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have rallied 51% in three months’ time.

Energous has an expected earnings growth rate of 44% for 2020. The stock has surged 44% over the past three months.

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