Caterpillar (CAT) May Retail Sales Fare the Worst Since 2016

Caterpillar Inc.’s CAT global retail sales witnessed a fall of 23% in the three-month period ended May 2020 following a slump of 22% in April — marking the sixth consecutive month of global retail sales decline. The company had last reported a decline of 21% in February 2016. This downside can be attributed to overall weak performance across all regions and segments primarily on account of the COVID-19 pandemic. Low oil prices, ongoing slowdown in the manufacturing sector, constrained spending in the mining sector, suspension of mining and construction activities to check the spread of the virus have taken a toll on the company’s performance.

Breakdown of May Performance

North America fared the worst during the month with a decline of 36% followed by Latin America, which witnessed a fall of 31%. EAME and Asia Pacific were down 14% and 1%, respectively.

The Resource Industries segment’s sales declined 21% in May — the seventh consecutive month of negative growth. While sales in North America plunged 39%, Latin America declined 36%. While Sales in EAME were down 12%, sales in Asia Pacific were down 9%.

Sales in the Construction Industries segment were down 23%, hitting a trough. The segment’s sales have been declining for six straight months. Sales in North America and Latin America were down 35% and 28%, respectively. EAME and Asia Pacific fell 23% and 2%, respectively.

Sales in the Energy & Transportation segment declined 17%. The segment has been contracting for eight consecutive months. Sales to Transportation and Industrial sectors plunged 33% and 32% respectively. Sales to the Oil & Gas sector were down 12%, while the Power Generation sector witnessed a decline of 10%.

Key Factors Weighing on Caterpillar

The negative sales trend comes on the heels of Caterpillar’s first-quarter 2020 results, which failed to impress investors. The mining and construction equipment behemoth’s adjusted earnings per share was down 46% year over year to $1.60 on lower demand across all segments and geographies.

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, industrial production slumped 11.2% in April — the worst drop in the 101-year history of the index. This slump can be attributed to factory closures and suspension of operations due the pandemic. Manufacturing output fell 13.7% in April — the steepest decline on record. This remains a concern for Caterpillar.

Per the Institute for Supply Management, the U.S Purchasing Managers’ Index (PMI) came in at 41.5% for April — the lowest since April 2009 when it registered 39.9%. In May, the PMI came in at 43.1%. Notably, a reading below 50 denotes contraction. This indicates that the COVID-19 pandemic and continuing energy market recession has clearly had an impact on the sector.

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 2020 guidance due to the uncertainty related to the impact of the pandemic. In fact, the company cautioned that the impact of the pandemic is 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

So far this year, Caterpillar stock has fallen 16.6%, compared with the industry’s decline of 17.5%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are SiteOne Landscape Supply, Inc. SITE, Broadwind Energy, Inc. BWEN and Axon Enterprise, Inc AAXN. While SiteOne Landscape sports a Zacks Rank #1 (Strong Buy), Broadwind Energy, Inc. (BWEN) and Axon Enterprise carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has appreciated 16% year to date.

Broadwind Energy has a projected earnings growth rate of 174% for 2020. The company’s shares have gained 75% so far this year.

Axon Enterprise has an estimated earnings growth rate of 14.2% for the ongoing year. The company’s shares have rallied 28% year to date.

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