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Caterpillar (CAT) Lags Q3 Earnings Estimates, Trims '19 View

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Caterpillar Inc. CAT reported third-quarter 2019 adjusted earnings per share of $2.66 lagging the Zacks Consensus Estimate of $2.83. The figure also declined 7% from the prior-year quarter’s adjusted earnings per share of $2.86. The ongoing global economic uncertainty and slowdown in the manufacturing sector resulted in dealers reducing their inventories and impacted sales across all the three segments.

Following the weaker-than-expected results and pruned guidance, Caterpillar’s shares fell 3% in pre-market trading.

Including one-time items, Caterpillar’s earnings per share came in at $2.88 in the prior-year quarter while there were no such adjustments in the reported quarter.

Caterpillar Inc. Price, Consensus and EPS Surprise


Revenues Lag Estimates

The company’s third-quarter revenues declined 6% year over year to $12.8 billion, missing the Zacks Consensus Estimate of $13.4 billion. Volumes were impacted as dealers reduced their inventories by $400 million in the reported quarter, after having ramped up inventories by $800 million in the year-ago quarter. Even though end-user demand was reported to be higher among the three primary segments, it was lower than expectations.

Latin America was the only region to deliver growth in sales of 2% in the July-September quarter. Meanwhile, Asia Pacific, EAME and North America witnessed declines of 13%, 7% and 3%, respectively.

Margins Dip on Lower Sales Volume

In third-quarter 2019, cost of sales decreased 5% year over year to $8.6 billion on higher manufacturing costs owing to higher variable labor and burden, and warranty expenses and higher material costs, including tariffs. Gross profit contracted 7% to $4.2 billion on higher manufacturing costs. Gross margin was 32.8% in the reported quarter, down from 33.2% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 4% to $1.2 billion. Research and development (R&D) expenses declined 10% from the prior-year quarter figure of $431 million. Operating profit in the quarter was $2.02 billion, down 5% from the prior-year quarter.  Benefits from favorable price realization and lower SG&A and R&D expense were offset by lower sales volume. Operating margin was 15.8% in the reported quarter, flat year over year.

Segment Performances Disappoint

Machinery and Energy & Transportation (ME&T) sales declined 6% year over year to $11.97 billion. Construction Industries sales dropped 7% year over year to $5.29 billion, owing to  unfavorable impact from changes in dealer inventories, partially offset by higher end-user demand for construction equipment.

Sales at Resource Industries declined 12% year over year to $2.3 billion due to changes in dealer inventories, partially mitigated by higher end-user demand for equipment and favorable price realization. Sales of Energy & Transportation segment in the quarter was at $5.45 billion, a drop of 2% from the prior-year quarter thanks to lower inter-segment engine sales.

The ME&T segment delivered operating profit of $1.89 billion, a decline of 9% from the year-ago quarter. The Resource Industries segment’s operating profit slumped 25% year over year to $311 million in third-quarter 2019. Construction Industries segment’s profit suffered year-over-year drop of 11% to $940 million. The Energy & Transportation segment, operating profit improved 5% year over year to $1.02 billion.

Financial Products’ revenues went up 2% to $865 million from the prior-year quarter. Financial Products' profits were $218 million in the reported quarter, up 8% from $201 million in the prior-year quarter.

Cash Position

Caterpillar ended third quarter-2019 with cash and short-term investments of $7.91 billion, down from $7.86 billion at 2018 end. In the reported quarter, ME&T operating cash flow was an outflow of $188 million as the company made a $1.5 billion discretionary pension contribution financed from proceeds of a debt issuance. During third-quarter 2019, the company repurchased $1.2 billion of its common stock and paid out dividends worth $0.6 billion.

Backlog Declines

At the end of third-quarter 2019, Caterpillar’s backlog was at $14.6 billion, a sequential drop of $400 million.

Lowers 2019 Guidance

For the fourth quarter, Caterpillar expects end-user demand to remain flat owing to the global economic uncertainty as dealers will make further inventory reductions.

For 2019, Caterpillar lowered adjusted earnings per share guidance to $10.59-$11.09 from the prior guidance of $11.75-$12.75. Including 31 cents per share discrete tax benefit related to U.S. tax reform, the guidance is at $10.90-$11.40. Caterpillar expects modesty lower sales in 2019.

Caterpillar’s continued focus on strategic investments, cost cutting measures, growing services and expanding offerings will deliver long-term profitable growth.
Price Performance

Over the past year, Caterpillar stock has gained 19.0%, outperforming the industry’s growth of 15.8%.
Zacks Rank & Stocks to Consider

Caterpillar currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Industrial Products sector are Atkore International Group Inc. ATKR, Cintas Corporation (CTAS - Free Report) and Sharps Compliance Corp SMED, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atkore International Group has a projected earnings growth rate of 19.8% for the current year. The stock has gained 65% in the past year.

Cintas has an estimated earnings growth rate of 12.74% for 2019. Shares of the company have rallied 58% in the past year.

Sharps Compliance has an estimated earnings growth rate of a whopping 500% for 2019. The company has appreciated 23% in a year’s time.

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