Caterpillar's (CAT – Free Caterpillar Stock Report) share price is lower this morning after the machinery manufacturer reported disappointing profits for the second quarter. Sales of $14.432 billion marked a 3% year-over-year increase and just beat our $14.400 billion call. The improvement was due primarily to price increases and higher volumes, which were driven by improved demand for various product lines within the Resource and Construction Industries segments.
Operating profits of $2.213 billion were aided by favorable price realizations, as well as a decrease in both SG&A and R&D expenses. This helped offset the negative effects of elevated manufacturing costs, partially due to tariffs (see below) and a somewhat weaker product mix. Caterpillar reported an operating margin of 15.3% in the June period, which narrowed slightly from the 15.5% recorded in the year-earlier period. Taking these factors together, share profits of $2.83 fell short of both the year-earlier tally of $2.97 and our estimate of $3.15.
The recent shortfall highlights a lack of consistency in meeting expectations. It also reflects negative factors in foreign markets. Management had warned earlier this year of market-share losses in China, where intense competition had led to price wars and construction activity had slowed. To make matters worse, the recent performance was hurt by an increase in the rate of U.S. tariffs (effective in May) on Chinese goods from 10% to 25%. That said, recent optimism in regards to U.S./China trade relations following a meeting between President Trump and China's President Xi Jinping at the G20 meeting may help ease conditions somewhat for Caterpillar in the world's biggest manufacturing hub.
Meanwhile, management's outlook for the full year remains intact. Caterpillar expects modest sales growth, which assumes a recovery in the oil and gas markets and enhanced results from dealers working through modestly high machine inventory levels. The company is still looking for price increases to help offset a recent run up in manufacturing costs, leading to an earnings-per-share range of $12.06 to $13.06. While, we expect another record year for profits, we have tempered our outlook. We are maintaining our sales estimate of $57 billion, but have lowered our bottom-line call by $0.15 a share, to $12.25.
Caterpillar retains solid 3- to 5-year prospects. We think the company will rely on a growing portfolio of services and expanding offerings to deliver long-term growth. Too, the uncertain operating backdrop has encouraged the company to focus on establishing a flexible and competitive cost structure, which may pay dividends down the road.
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
