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Bear of the Day: Caterpillar (CAT)

Benjamin Rains

Caterpillar (CAT) fell short of Q1 fiscal 2020 estimates on Tuesday, as the coronavirus takes its toll on the economy and big purchases. Plus, the construction and mining equipment powerhouse had already pulled its 2020 financial outlook in late March.   

CAT’s Recent Results & COVID Worries

Caterpillar faces a rough near-term outlook because the coronavirus has caused companies to delay making big purchases, given the nearly unprecedented economic uncertainty brought on by the pandemic. The company’s Q1 revenue dropped 21% from the year-ago period, which came in below our Zacks estimate.

Meanwhile, CAT’s adjusted first quarter earnings tumbled 46% from the prior-year quarter to hit $1.60 a share. This also missed our estimate by roughly 9%. More importantly, the Deerfield, Illinois-based firm didn’t provide any updated earnings guidance after it withdrew its previous outlook on March 26.

 

 

 

 

 

 

 

Investors should also note that Caterpillar’s operating profit margin dipped to 13.2% in the first quarter, down from 16.4% in Q1 FY19. In order to bolster its balance sheet during the global economic downturn, CAT announced that in April it “raised $2.0 billion of incremental cash by issuing new 10- and 30-year bonds and arranged $8.0 billion of additional back-up facilities to supplement the company’s liquidity position.”

Meanwhile, Caterpillar wrote in its first quarter release that it “has suspended operations temporarily at certain facilities during the last several weeks due to supply chain issues, weak customer demand or government regulations. As of mid-April 2020, globally and across the three primary segments, approximately 75% of the company’s primary production facilities continue to operate. Some facilities that were temporarily closed have reopened.”

Outlook

Before we look ahead, it is worth noting that CAT’s estimates are likely to change in the coming days as more analysts update their outlooks based on its recently-reported results. That said, our current Zacks estimates call for CAT’s adjusted Q2 earnings to plummet 67% on 32.6% lower revenue.  

Overall, CAT’s fiscal 2020 revenue is projected to fall 22%, with its earnings expected to tank 43.8%. The nearby graphic helps show just how far Caterpillar’s overall fiscal 2020 and 2021 earnings estimates have fallen recently—33.9% and 29.5%, respectively.

 

 

 

 

 

 

 

Bottom Line

CAT stock is currently a Zacks Rank #5 (Strong Sell) based on its recent earnings revision activity. Caterpillar is also part of an industry that rests in the bottom 6% of our more than 250 Zacks industries and includes Terex Corporation (TEX) and H&E Equipment Services (HEES).

Caterpillar is currently exposed to the broad economic uncertainty, and now might be a time to stay away until we see more signs of a coronavirus recovery.

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