Caterpillar Inc.’s CAT global retail sales recorded a decline of 7% in the three-month period ended January 2020, weighed down by weak performance across all regions and segments. This disappointing performance follows a 5% drop in December, which put an abrupt end to the company’s sales growth for 33 straight months. The company had last witnessed negative sales growth in February 2017.
Analyzing the January Numbers
In January, North America fared the worst with an 11% drop. Sales in EAME were down 5% while Asia Pacific and Latin America both were down 2%.
The Resource Industries segment’s sales declined 7% in January – the third consecutive month of negative growth. In January, sales in North America plunged 23% followed by a 15% decline in sales in Latin America. Sales in EAME were also down 10%. Asia Pacific was the only bright spot, delivering sales growth of 31%.
Sales in the Construction Industries segment were down 6%, following a decline of 3% in December. A 5% improvement in January sales in Latin America was offset by decline in sales elsewhere. Asia Pacific disappointed with a decline of 12% in sales. North America was down 6% and EAME suffered a 3% dip.
Sales in the Energy & Transportation segment declined 2%. The segment has been contracting for four consecutive months. The Transportation and Industrial sectors reported sales growth of 17% and 7%, respectively. This upbeat performance was offset by a decline of 11% in sales in the Oil & Gas sector and a dip of 1% in Power Generation sales.
Notably, the company had previously gone through an unprecedented 51-month long stretch of declining sales spanning December 2012 to February 2017. However, since March 2017, Caterpillar has been reporting positive sales growth, delivering an average retail sales growth of 10.3% in 2017, 23.5% in 2018 and 4.4% in 2019.
Fourth Quarter Bears the Brunt of Lower Demand
In fourth-quarter 2019, Caterpillar’s revenues declined 8% year over year to $13.1 billion. Sales were impacted by lower volumes as dealers reduced their inventories by $700 million in the reported quarter. Demand was also weak in Construction Industries and Resource Industries. Despite the drop in revenues, Caterpillar’s fourth-quarter adjusted earnings per share improved 3% year over year to $2.63 primarily driven by cost control efforts.
2020 Outlook Muted on Global Uncertainty
For 2020, Caterpillar expects adjusted earnings per share guidance between $8.50 and $10.00. The mid-point of the guidance indicates a year-over-year fall of 16%. Dealers are anticipated to continue to reduce inventories, owing to the ongoing global economic uncertainty. Further, end user demand is expected to decline by about 4% to 9% compared with 2019. Moreover, while commodity prices are generally supportive of reinvestment, mining customers remained disciplined with their capital expenditures due to economic uncertainty. This will continue to weigh on the Resource Industries segment’s performance.
The Zacks Consensus Estimate for earnings in fiscal 2020 is pegged at $9.41, suggesting a decline of 15% from the prior year. The estimate for revenues for the fiscal is at $49.4 billion, suggesting year-over-year slump of 8%.
Primary Concerns
The U.S.-China trade tensions and waning global demand have taken its toll on the U.S manufacturing sector, which in turn has impacted Caterpillar’s performance. Overall, for the fourth quarter, total industrial production declined at an annual rate of 0.5%. Further, per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) was 47.2% in December 2019 — the fifth month of contraction in the sector. Even though the index has climbed to 50.9 in January, it remains to be seen whether this recovery will stay.
To make matters worse, the coronavirus outbreak in China remains an overhang considering that China is a major market for Caterpillar. However, all these macro factors are beyond the company’s control. Thereby, Caterpillar is making every effort to reduce production to match dealer demand and will proactively increase production once order levels improve.
The company continues to focus on customers and on the future by continuing to invest in digital capabilities, connecting assets and jobsites, and developing the next generation of more productive and efficient products. The company plans to fund initiatives that drive long-term profitable growth focused on areas of expanded offerings and services and digital initiatives like e-commerce.
Price Performance
Caterpillar stock has gained 2.6% over the past year, compared with the industry’s growth of 1.4%.
Zacks Rank & Key Picks
Caterpillar currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Sharps Compliance Corp SMED and Graco Inc. GGG. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.
Northwest Pipe has an expected earnings growth rate of 19.5% for the current year. The stock has appreciated 49% over the past year.
Sharps Compliance has an estimated earnings growth rate of 767% for the ongoing year. In a year’s time, the company’s shares have gained 36%.
Graco has a projected earnings growth rate of 4.3% for 2020. The company’s shares have rallied 21% over the past year.
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