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Caterpillar (CAT) Up 7.1% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Caterpillar (CAT - Free Report) . Shares have added about 7.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Caterpillar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Caterpillar Lags Q3 Earnings Estimates, Trims '19 View

Caterpillar 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.

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.

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 and dealers to make further inventory reductions owing to the global economic uncertainty.

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.
 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -14.66% due to these changes.

VGM Scores

Currently, Caterpillar has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Caterpillar has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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