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Caterpillar's Retail Sales Growth Continues to Decelerate

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Caterpillar Inc. (CAT - Free Report) reported a rise of 18% in global retail sales for the three months ended October 2018, a deceleration from improvement of 21% witnessed in September and the lowest sales growth rate recorded so far this year.
 
Notwithstanding this recent decline, Caterpillar reported average sales growth of 26% in the first ten months of 2018, a significant improvement from an average of 6% in the year-ago period. Further, Resource Industries, Construction Industries and Energy & Transportation continued to report positive gains for the 16th, 21st and 14th consecutive months, respectively.
 
In October, Caterpillar’s performance was led by a rise of 23% in sales in Latin America followed by growth of 21% and 20% in North America and Asia Pacific, respectively. Europe, Africa and Middle East (“EAME”) sales improved 9%. Compared with September, sales growth decelerated across all regions, except EAME.
 
Resource Industries & Construction Disappoint
 
Resource Industries segment reported growth of 46% in October, tad lower than the rise of 47% in September but marked a deceleration from the year-to-date peak of 60% witnessed in March. Sales in Asia Pacific and Latin America surged 85% and 82%, respectively. Sales in North America rose 46% while EAME surged 11%. Notably, North America and Latin America were the only regions to register improvement from September.
 
Sales growth in the Construction Industries segment went up 12%, down from growth of 16% noted in September. It also marked the lowest sales growth so far in 2018. Sales increased 18% in North America, 9% in EAME and 8% in Asia Pacific. Sales growth slumped in Asia Pacific and North America from September. Sales in Latin America dipped 1%.
 
Sales in the Energy & Transportation segment rose 7%, flat compared with September. The Oil & Gas sector and Power Generation sector reported sales growth of 20% and 13%, respectively. Sales to the Transportation sector and Industrial sector declined 27% and 11%, respectively.
 
Is the Recent Slowdown a Cause of Concern?
 
The company’s overall retail sales growth graph has remained in the positive territory since March 2017, closing the year with an average of 10.3% in 2017. In the first eight ten months of 2018, Caterpillar reported average sales growth of 26%.
 
In third-quarter 2018, Caterpillar delivered adjusted earnings per share of $2.86 in third-quarter 2018, surging 47% year over year. This can be attributed to continued strength in many of its end markets and incessant focus on cost control. Revenues improved 18% year over year to $13.5 billion in the third quarter. The quarterly performance marked the company’s seventh consecutive quarter of both top and bottom-line growth after a string of dismal performances for four years.
 
Backed by robust performance so far in 2018, healthy order rates, backlog and improving end-markets, Caterpillar maintained adjusted earnings per share guidance at $11.00-$12.00 for fiscal 2018. The company anticipates price realization, operational excellence and cost discipline to help mitigate the impact of higher material and freight costs, including tariffs.
 
The Zacks Consensus Estimate for fiscal 2018 is at $11.64, projecting year-over-year growth of 69%. For fiscal 2019, the estimate is pegged at $12.76, reflecting growth of 10%.
 
 

Caterpillar has declined 6% over the past year, while the industry dipped 8%. The recent slowdown in retail sales seems to be weighing the stock down. Further, the recently imposed tariffs have led to raw material inflation and supply chain challenges continue to pressure freight costs. However, the company plans to negate these impacts through price increases, utilizing the Operating & Execution Model to drive operational excellence and structural cost discipline.
 
The recent dip in sales growth is likely to be transitory in nature as the company is anticipated to benefit from strong order rates and an increasing backlog through the balance of 2018. The Construction segment will gain from infrastructure development in China and continued demand improvement in North American residential, non-residential and infrastructure markets. Rising commodity prices will drive Resource Industries and Energy & Transportation’s revenues. Further, cost cutting efforts and additional investments in expanded offerings and services will drive growth.
 
Caterpillar currently carries a Zacks Rank #3 (Hold).
 
Stocks to Consider
 
Better-ranked stocks in the same sector include Enersys (ENS - Free Report) , Flowserve Corporation (FLS - Free Report) and Lawson Products, Inc. . While Enersys sports a Zacks Rank #1 (Strong Buy), Flowserve and Lawson Products carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Enersys has a long-term earnings growth rate of 10%. Shares of the company have appreciated 28% over the past year.
 
Flowserve has a long-term earnings growth rate of 17%. Its shares have rallied around 24% in the past year.
 
Lawson Products has a long-term earnings growth rate of 18%. Shares of the company have gained 35% in a year’s time.
 
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