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Caterpillar April Retail Sales Slump the Steepest Since 2016

Zacks Equity Research

Caterpillar Inc.’s CAT global retail sales witnessed a decline of 22% in the three-month period ended April 2020. The company had last reported a decline of 21% in February 2016 and suffered a fall of 27% in January 2010. This can be attributed to overall weak performance across all regions and segments primarily on account of the COVID-19 pandemic. Low oil prices, constrained spending in the mining sector, suspension of mining operations, construction and transport to check the spread of the virus have taken a toll on the company’s performance.

April Numbers Worst So Far This Year

April marks the fifth consecutive month that Caterpillar’s global retail sales have been in the negative territory. Latin America fared the worst with a decline of 28% followed by North America, which witnessed a fall of 27%. Asia Pacific and EAME were down 17% and 15%, respectively.

The Resource Industries segment’s sales declined 24% in April — the sixth consecutive month of negative growth and hit the lowest point this year. While sales in Latin America plunged 44%, North America declined 30%. Sales in Asia Pacific were down 26% while in EMEA were flat.

Sales in the Construction Industries segment were down 21%, hitting a trough. The segment’s sales have been declining for five straight months. Sales in North America and EAME were down 26% and 20%, respectively. Latin America and Asia Pacific fell 18% and 14%, respectively.

Sales in the Energy & Transportation segment declined 19% — the worst performance in 2020. The segment has been contracting for seven consecutive months. Sales to Oil & Gas sector, the Industrial sector and the Transportation sectors, all declined 26%. The Power Generation sector witnessed a decline of 5%.

Notably, the company had previously gone through an unprecedented 51-month long stretch of declining sales from December 2012 to February 2017. However, since March 2017, Caterpillar has been reporting positive sales growth, delivering an average retail sales improvement of 10.3% in 2017, 23.5% in 2018 and 4.4% in 2019 before slipping in to the negative territory again this year.

Q1 Results Bear the Brunt of Lower Demand

This disappointing performance comes on the heels of Caterpillar’s first-quarter 2020 results, which failed to impress investors. The mining and construction equipment behemoth’s revenues slumped 21% year over year to $10.6 billion and adjusted earnings per share was down 46% year over year to $1.60 on lower demand across all segments and geographies. The company did not provide any guidance for 2020 and cautioned that results for the remainder of the year will bear the impact of the coronavirus pandemic.

Ongoing Concerns for Caterpillar

The coronavirus pandemic has dealt a major blow to the manufacturing sector, which was already bearing the brunt of a protracted U.S.-China trade tensions and waning global demand. Per the Federal Reserve, manufacturing output slumped at an annual rate of 7.1% in the first quarter, the sharpest since first-quarter 2009. Per the Institute for Supply Management, the Manufacturing Purchasing Managers’ Index (PMI), after recording 50.9% in January, and 50.1% in February (indicating expansion), contracted to 49.1% in March. In April, the index has further contracted to 41.5%. This indicates that the COVID-19 pandemic and continuing energy market recession has clearly had an impact on the sector. Caterpillar, being a prominent player in the industry is not immune to this trend.

Caterpillar had to suspend operations temporarily at certain facilities on account of supply chain issues, weak demand or as per government mandates to stem the spread of the coronavirus. Currently, approximately 75% of the company’s primary production facilities continue to operate. Some facilities that were temporarily closed have been reopened.

The company had withdrawn guidance for 2020 due to the uncertainty related to the impact of the pandemic. The company however cautioned that the impacts of the pandemic are likely to be more pronounced on the second quarter results and linger until global economic conditions improve. The company added that it may have to suspend operations temporarily at additional facilities if necessary.

Meanwhile, it has taken actions to reduce costs, which include cutting down discretionary expenses, and suspending 2020 base salary increases and short-term incentive compensation plans for many employees and all senior executives. The company remains focused on making continued investment in services and expanded offerings, which are crucial to its strategy for profitable growth.

Price Performance

Over the past three months, Caterpillar stock has fallen 24.2%, compared with the industry’s decline of 25.3%.

Zacks Rank & Stocks to Consider

Caterpillar currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the Industrial Products sector are Ampco-Pittsburgh Corporation AP, Hudson Technologies Inc. HDSN and Energous Corporation WATT. While Ampco-Pittsburgh sports a Zacks Rank #1 (Strong Buy), Hudson Technologies and Energous Corporation carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ampco-Pittsburgh has an expected earnings growth rate of 2.70% for the current year. The stock has appreciated 10.3% in the past three months.

Hudson Technologies has a projected earnings growth rate of 83.9% for 2020. The company’s shares have gained 2% over the past three months.

Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 7.5% in three months’ time.

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