Shares of Caterpillar (CAT – Free Caterpillar Stock Report) are down modestly in trading after the capital goods manufacturer reported disappointing third-quarter results. Heightened economic uncertainty, primarily due to the U.S./China trade war, resulted in a 6% year-over-year decline in sales, to $12.8 billion, which fell below our $13.6 billion call. The miss is due to the unfavorable impact of changes in dealer inventories, partially offset by higher end-user demand across the three primary segments. Specifically, dealers decreased machine and engine inventories about $400 million in the quarter, compared to a surge of $800 million in the prior-year period.
The decrease in volumes offset the positive impact of price increases and moderation in both selling, general, and administrative and research and development expenses. Meantime, the operating profit margin was flat, at 15.8%. In all, share net of $2.66 came in below the $2.86 posted in the year-ago period and missed our $3.00 mark.
Continued tepid end-market demand is likely to weigh on December-quarter results, as well. In particular, dealers are liable to make further inventory reductions due to lingering economic uncertainty. The venerable company is seeking to mitigate the negative impact of the unfavorable backdrop by expanding offerings and investing in services, including digital capabilities. Unfortunately for Caterpillar, machine sales have slipped in Asia (especially China) and the U.S. at a time the company is attempting to boost prices. We are unsure that dealers and customers will remain receptive to such actions. To make matters worse, the International Monetary Fund recently cut its 2019 global economic forecast to a decade low.
Altogether, Caterpillar has lowered its full-year 2019 profit-per-share range to $10.59 to $11.09, compared to a prior outlook of $11.75 to $12.75. This bracket excludes the first-quarter $0.31-per-share discrete tax benefit. We have cut our top- and bottom-line estimates for the current year by $1.68 billion and $0.50 a share, to $54.50 billion and $11.35, respectively. The guidance suggests that the deterioration in Asia that the company emphasized in July has worsened. Caterpillar is optimistic that the return of more capital will help retain shareholder interest. Recall, CAT hiked the quarterly dividend 20%, to $1.03 per share, and has called for more consistent share repurchases.
Although Caterpillar stock is up 6.2% year to date, it is still trading 8.2% below its 52-week high. As such, the equity is trading at a P/E ratio that is well below the level we expect for the 3- to 5-year pull, and the recent quotation serves as a good entry point for buy-and-hold investors. The company's growing portfolio of digital capabilities, which should make more meaningful contributions to operations over the same time frame, ought to help lower cyclical fluctuations in CAT shares.
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
