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Caterpillar (CAT) Down 8.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Caterpillar (CAT - Free Report) . Shares have lost about 8.2% in that time frame, outperforming the S&P 500.

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

Caterpillar Q4 Earnings Beat Estimates on Cost Control

Caterpillar reported fourth-quarter 2019 adjusted earnings per share of $2.63, which surpassed the Zacks Consensus Estimate of $2.37 by a margin of 11%. The figure increased 3% from the prior-year quarter’s adjusted earnings per share of $2.55. The company’s commitment toward strong cost control helped mitigate the impact of weak demand, and drove earnings.  

Despite delivering better-than-expected earnings in the quarter, Caterpillar’s shares fell 0.28% in pre-market trading thanks to a tepid 2020 guidance.
Including one-time items, Caterpillar’s earnings per share came in at $1.97 in fourth-quarter 2019 compared with $1.78 in the prior-year quarter.

Revenues Lag Estimates on Low Demand

The company’s fourth-quarter revenues declined 8% year over year to $13.1 billion, missing the Zacks Consensus Estimate of $13.6 billion. Sales were impacted by lower sales volumes as dealers reduced their inventories by $700 million in the reported quarter. Demand was also weak in Construction Industries and Resource Industries.

The company witnessed decline in sales across the board. Sales in Latin America fell 15% followed by a decline of 13% in North America. Meanwhile, sales in EAME were down 5% while sales in Asia Pacific remained flat.

Margins Gain on Lower Costs & Expenses

In fourth-quarter 2019, cost of sales decreased 9% year over year to $9.1 billion. Manufacturing costs were down due to lower period manufacturing and material costs, partially offset by higher warranty expense. Period manufacturing costs declined owing to lower short-term incentive compensation and favorable impact of restructuring and cost-reduction actions.

Gross profit contracted 7.5% to $4 billion on lower sales. Gross margin was 30.6% in the reported quarter, up marginally from 30.4% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 12% to around $1.3 billion. Research and development (R&D) expenses declined 17% to $386 million from the prior-year quarter figure of $466 million. Operating profit in the quarter was $1.85 billion, down 2% from the prior-year quarter.  Benefits from lower SG&A and R&D expense were offset by lower sales volume. Operating margin was 14.1% in the reported quarter, up 100 basis points from the prior-year quarter.

Weak Demand Weighs on Segment Performances

Machinery and Energy & Transportation (ME&T) sales declined 9% year over year to $12.8 billion. Construction Industries sales dropped 12% year over year to $5 billion on account of  lower sales volume owing to changes in dealer inventories.

Sales at Resource Industries declined 14% year over year to $2.4 billion due to lower sales volume. This can be attributed to changes in dealer inventories and lower end-user demand. Sales of Energy & Transportation segment in the quarter was at $5.95 billion, a decline of 5% from the prior-year quarter due to lower inter-segment engine sales and unfavorable currency impacts.

The ME&T segment reported operating profit of $1.75 billion, a decline of 8% from the year-ago quarter. The Resource Industries segment’s operating profit slumped 35% year over year to $261 million in fourth-quarter 2019. Construction Industries segment’s profit witnessed a year-over-year decrease of 22% to $659 million. The Energy & Transportation segment, operating profit improved 8% year over year to $1.17 billion.

Financial Products’ revenues went up 4% to $846 million from the prior-year quarter. Financial Products' profits were $210 million in the reported quarter, a significant improvement of 624% from $29 million in the prior-year quarter. This was due to lower provisions for credit losses related to the Cat Power Finance portfolio compared with year-ago quarter.

Cash Position

For 2019, ME&T operating cash flow was $4.9 billion. The company made a $1.5 billion discretionary pension contribution financed from proceeds of a debt issuance during the year. During 2019, the company repurchased $4 billion of its common stock and paid out dividends worth $2.1 billion. Caterpillar ended 2019 with cash and short-term investments of $8.3 billion, up from $7.9 billion at 2018 end.

Backlog Declines

At the end of fourth-quarter 2019, Caterpillar’s backlog was at $13.7 billion, a sequential decline of $900 million.

2019 Results

Caterpillar reported adjusted earnings per share of $11.06 in 2019, down 1% from the prior-year reported figure of $11.22. However, the bottom line beat the Zacks Consensus Estimate of $10.83 and management guidance of $10.59-$11.09. Including one-time items, earnings came in at $10.74, up 5% from $10.26 in 2018.

Sales dipped 2% year over year to around $53.8 billion from the prior-year figure of $54.7 billion. The top line surpassed the Zacks Consensus Estimate of $51.7 billion.

2020 Guidance

For 2020, Caterpillar expects adjusted earnings per share guidance between $8.50 and $10.00. The mid-point of the guidance indicates a fall of 16% from the adjusted earnings per share of $11.06.

The company anticipates dealers will continue to reduce inventories due to the ongoing global economic uncertainty. Caterpillar continues to monitor end-user demand and has been successful in reducing the lead times. Shorter lead times enable both the company and its dealers to adapt quickly to changing market conditions.  Moreover, 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, fresh estimates have trended downward during the past month. The consensus estimate has shifted -21.16% due to these changes.

VGM Scores

At this time, Caterpillar has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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