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Caterpillar February Sales Dip 1%: Is a Turnaround Ahead?

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Caterpillar Inc.’s (CAT - Free Report) February sales witnessed a meager dip of 1%, a welcome news for the beleaguered mining and construction equipment behemoth as it continues to grapple with weak mining demand and tax probes. Despite growth still lingering in the negative territory, this marked the company’s narrowest decline since Dec 2012. Consequently, Caterpillar’s shares gained 2.68% to close yesterday at $95.40 and were also the biggest price gainer within the Dow.

The reported dip of 1% in February sales is an improvement from the 8% drop witnessed in January sales as well as the 21% plunge suffered in February last year. On an average, sales had dipped 15% in 2016. In fact, the company’s sales growth has been in the red for an unprecedented stretch of 51 consecutive months with sales decline ranging from 1–21% as it continues to face low-end user demand due to economic weakness globally. This phase is further aggravated than the 19-month long stretch spanning from Oct 2008 to Apr 2010 wherein the company had suffered the same fate due to recession.

As per the company’s recent Feb 2017 sales report, overall performance was dragged down by a 21% slump in Latin America while sales continue to fall in North America and Europe, Africa and Middle East (EAME) with declines of 10% and 3%, respectively. Asia Pacific region remains the only bright spot, which saw an impressive rise of 39% in sales. The region has been exhibiting strength since Aug 2016 with the growth graph for machine retail sales steadily picking up steam from single digits to current levels of above 30%.

Caterpillar, Inc. Price
 

Caterpillar, Inc. Price | Caterpillar, Inc. Quote

Overall sales at Resource Industries, which continues to bear the brunt of weak mining spending due to lower commodity prices, were down 7%. Latin American sales witnessed the maximum decline of 39%, followed by a 12% drop in North America. On the contrary, sales in EAME improved 16% and the Asia Pacific region recorded an increase of 1%.

Sales in Construction Industries improved 2% year over year. Further, this comes after a hiatus as the company had last witnessed a 3% rise in construction sales in Jun 2014.  Sales surged 52% in Asia Pacific that helped offset 9% decline in Latin America, EAME and North America. In construction, Asia Pacific had resumed growth in Mar 2016 and since then the sales growth has displayed an upward trend. Growth has particularly picked up in the last few months ranging from 21% in Dec 2016, 27% in Jan 2017 and catapulting to 52% in Feb 2017.

Sales in the Energy & Transportation segment fell 9% mainly due to a 15% plunge in the Transportation sector. Sales in the Power Generation sector declined 13% owing to 11% decrease in the Industrial sector. Further, the Oil & Gas sector declined 3%.

This month Caterpillar’s share price has been battered by reports suggesting that it knowingly committed tax fraud in an effort to boost share price. On Mar 2, Federal investigators executed search warrants on three separate company offices, including headquarters in Peoria, IL. However, Caterpillar maintained that it was cooperating with the investigation, which likely linked to accusations surrounding its Swiss parts subsidiary, CSARL.

In construction, Asia Pacific is showing promise lately and leading indicators of U.S. non-residential construction signal robust conditions ahead for the domestic construction industry. To counteract the effect of weak mining on top line, Caterpillar tenaciously continues to cut down costs and reduce capacity. This along with other restructuring actions, and share repurchases will aid the mining behemoth to stay afloat despite weak demand. Further, Caterpillar is expected to be a major beneficiary of Trump’s national infrastructure plan which would be instrumental in reviving the demand for the behemoth.

The Caterpillar stock has outperformed the Zacks Categorized Machinery – Construction/Mining sub industry in year to date. The company has delivered a return of 3.8% in the said time frame, outpacing the aforesaid Zacks sub industry’s gain of 3.1%.



Meanwhile, the ongoing tax probe remains an overhang on the stock. If the allegations against Caterpillar are proved to be true, this could have a substantial impact on its reputation and operations.

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

Better-ranked stocks in the sector include ACCO Brands Corp. (ACCO - Free Report) , EnerSys (ENS - Free Report) and John Bean Technologies Corp. (JBT - Free Report) . ACCO Brands has delivered an average positive earnings surprise of 24.74% in the trailing four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

EnerSys and John Bean Technologies, both Zacks Rank #2 (Buy) stocks have average positive earnings surprise of 4.39% and 21.01%, respectively in the preceding four quarters.

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