Caterpillar (CAT) Up 2% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Caterpillar (CAT). Shares have added about 2% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Caterpillar Q1 Earnings Lag Estimates on Weak Demand

Caterpillar reported first-quarter 2020 adjusted earnings per share of $1.60, which missed the Zacks Consensus Estimate of $1.77. The bottom line also plunged 46% from the prior-year quarter’s adjusted earnings per share of $2.94. The disappointing performance can primarily be attributed to lower demand across all segments and geographies. The company also did not provide any guidance for 2020 and stated that results for the remainder of the year will bear the impact of the coronavirus pandemic.

Including one-time items, Caterpillar’s earnings per share came in at $1.98 in first-quarter 2020, 39% lower than $3.25 in the prior-year quarter.

Revenues Lag Estimates on Low Demand

The company’s first-quarter revenues slumped 21% year over year to $10.6 billion, missing the Zacks Consensus Estimate of $11.13 billion. Sales were impacted by lower sales volumes on account of weak demand.

The company witnessed decline in sales across the board. Sales in Asia Pacific fell 27% followed by a decline of 24% in North America. While sales in Latin America were down 21%, sales in EAME declined 7%.

Margins Dip on Lower Sales Volume

In first-quarter 2020, cost of sales decreased 19% year over year to $7.3 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 the favorable impact cost-reduction actions implemented in the wake of low demand.

Gross profit contracted 25% to $3.37 billion on lower sales. Gross margin was 31.7% in the reported quarter, down from 33.1% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 15% to around $1.1 billion. Research and development (R&D) expenses declined 18% to $356 million from the prior-year quarter figure of $435 million. Operating profit in the quarter was $1.4 billion, down 36% from the prior-year quarter.  Benefits from lower SG&A and R&D expense, and favorable manufacturing costs were offset by lower sales volume and unfavorable currency impacts related to the Australian dollar. Operating margin was 13.2% in the reported quarter, down 320 basis points from the prior-year quarter.

Segment Performances Dented By Weak Demand

Machinery and Energy & Transportation (ME&T) sales plunged 22% year over year to $9.9 billion. Construction Industries sales slumped 27% year over year to $4.3 billion owing to lower sales volumes. Sales at Resource Industries declined 24% year over year to around $2.1 billion due to lower sales volume. Spending on mining equipment was muted due to lower commodity prices. Demand for equipment supporting non-residential construction and quarry and aggregates was also impacted in the quarter. Sales of Energy & Transportation segment in the quarter was at $4.3 billion, a decline of 17% from the prior-year quarter on account of lower sales across all applications.

The ME&T segment reported operating profit of $1.34 billion, a decline of 38% from the year-ago quarter. The Resource Industries segment’s operating profit slumped 47% year over year to $304 million in first-quarter 2020. Construction Industries segment’s profit witnessed a year-over-year decrease of 41% to $640 million. The Energy & Transportation segment’s operating profit declined 28% year over year to $602 million.

Financial Products’ revenues went down 4% to $814 million from the prior-year quarter. Financial Products' profits were $105 million in the reported quarter, down 50% from $211 million in the prior-year quarter.

Cash Position

For the first quarter, operating cash flow was $1.13 billion compared with $1.12 billion in the prior-year quarter. Caterpillar ended first-quarter 2020 with cash and short-term investments of $7.1 billion and available global credit facilities of $10.5 billion. In April, Caterpillar 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.

Other Updates

Caterpillar stated that it 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 reopened.

The company cautioned that it may 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. Caterpillar remains focused on making continued investment in services and expanded offerings, which are crucial to its strategy for profitable growth.

Earlier, on Mar 26, 2020 Caterpillar had withdrawn guidance for 2020 due to the uncertainty related to the impact of the pandemic. The company has not provided any guidance with quarterly release as well.  However, it cautioned that its financial results for the remainder of 2020 will bear the impact of the persistent global economic uncertainty due to the COVID-19 pandemic.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -26.44% due to these changes.

VGM Scores

At this time, Caterpillar has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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

Caterpillar has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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