Shares of Caterpillar (CAT – Free Caterpillar Stock Report) traded modestly lower after the manufacturer reported its first-quarter results. Note that the following results fell short of our outlook from February, but beat consensus expectations. Wall Street in recent months had taken a more cautious approach towards the company, which experienced a slowdown in a key market (China) in late 2018, and faced ongoing uncertainties related to restrictive trade policies.
Sales of $13.466 billion eclipsed the $12.859 billion posted in the year-earlier period, but came in below our $13.650 billion call. Year over year, the 5% gain was due to higher sales volume driven by demand for both equipment and services, with a notable increase in the Resource Industries segment. Volume also rose in the Construction Industries unit, while the Energy & Transportation division reported flattish results. Price hikes in the Construction Industries and Resource Industries businesses also contributed to the improvement. Geographically, gains were especially strong in North America and showed surprising vigor in the Asia/Pacific region.
Increased prices and higher volume formed a potent combination, and helped to overcome the negative effects of elevated manufacturing costs and SG&A expenses. Altogether, share net of $2.94 marked a 4% year-over-year gain, but fell modestly below our $3.00 estimate. (Our presentation excludes a one-time $0.31-per-share discrete tax benefit stemming from U.S. tax reform.)
Caterpillar, considered a proxy for the global economy, is optimistic that fundamentals in its diverse end markets will remain healthy. The Construction Industries business should continue to be driven by strong demand for new equipment, primarily to support road construction activities in North America. Meanwhile, solid mining production levels and commodity market fundamentals ought to power sales in the Resource Industries unit. Lastly, The Energy & Transportation division will probably benefit from a sequential uptick in spending within the upstream sector across North America. Excluding the aforementioned tax gain in the first quarter, management has left its full-year 2019 profit guidance of $11.75-$12.75 per share intact. Thus, we are maintaining our top- and bottom-line estimates of $58 billion and $12.50 a share, respectively.
While Caterpillar stock is trading near its 2019 high point, the recent quotation serves as a good entry point for investors seeking a capital goods company with favorable long-term prospects. In fact, these shares continue to trade at a discount based on the P/E level we expect over the 3- to 5-year pull.
About The Company: Caterpillar Incorporated is the world’s largest producer of earth-moving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks.
- Dominic Silva
