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Caterpillar (CAT) Up 17.1% Since Last Earnings Report: Can It Continue?

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Zacks Equity Research
·5 min read
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A month has gone by since the last earnings report for Caterpillar (CAT). Shares have added about 17.1% in that time frame, outperforming 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's Q4 Earnings & Revenues Beat Estimates

Caterpillar reported fourth-quarter 2020 adjusted earnings per share of $2.12, which beat the Zacks Consensus Estimate of $1.46 by a margin of 45%. However, the bottom line declined 22% from the prior-year quarter’s adjusted earnings per share of $2.71 as sales fell across all segments and geographies due to weak demand.

Including one-time items, Caterpillar’s fourth-quarter earnings per share was $1.42, reflecting a decline of 28% from the prior-year quarter figure of $1.97.

Weak Demand Across All Regions Weighs on Revenues

The company’s fourth-quarter revenues of $11.24 billion surpassed the Zacks Consensus Estimate of $11.18 billion. However, the top line declined 15% from the year-ago quarter on lower sales volume. This was primarily due to low end-user demand amid the coronavirus pandemic and the impact of changes in dealer inventories.
 
The company witnessed decline in sales across the board. Sales in North America slumped 21% followed by a decline of 11% in EAME. Sales in Latin America and Asia Pacific were down 9% and 8%, respectively.

Margins Dip on Lower Sales

In fourth-quarter 2020, cost of sales decreased 15% year over year to $7.8 billion. Manufacturing costs were lower in the quarter aided by lower material and period manufacturing costs, favorable impact from cost absorption and cost-reduction actions implemented in response to lower sales volumes. Higher warranty expense negated some of these gains.

Gross profit declined 14% year over year to $3.45 billion on lower sales. Gross margin was 30.7% in the quarter under review compared with 30.6% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 5% to around $1.2 billion. Research and development (R&D) expenses declined 3% to $374 million from the prior-year quarter figure of $386 million. Both SG&A and R&D expenses in the quarter benefited from reduced short-term incentive compensation expense and other cost reductions owing to lower volumes. Higher labor and benefits costs remained hindrances.

Operating profit in the quarter plunged 25% year over year to $1.38 billion, primarily dragged down by lower sales volume. Gains from favorable manufacturing costs, reduced SG&A and R&D expenses were not adequate to mitigate this impact. Operating margin was 12.3% in the reported quarter, down 180 basis points from the prior-year quarter.

Segment Performance

Machinery and Energy & Transportation (ME&T) sales fell 15% year over year to $10.6 billion in fourth-quarter 2020. Construction Industries sales were down 10% year over year to $4.5 billion due to lower sales volumes on account of reduced end-user demand and the impact of changes in dealer inventories.

Sales at Resource Industries declined 9% year over year to around $2.2 billion on lower sales volume, primarily due to lower end-user demand for equipment and aftermarket parts.

Sales of Energy & Transportation segment in the quarter were around $4.8 billion, reflecting a decline of 19% from the prior-year quarter. The downside was on account of lower sales across all applications.

The ME&T segment reported operating profit of $1,306 million, reflecting a slump of 25% from the year-ago quarter. The Energy & Transportation segment’s operating profit plunged 41% year over year to $687 million. The Construction Industries segment witnessed a year-over-year decline of 4% in operating profit to $630 million. The Resource Industries segment’s operating profit increased 5% year over year to $273 million in fourth-quarter 2020.

Financial Products’ revenues went down 12% to $743 million from the prior-year quarter. Financial Products' profits were $195 million in the reported quarter compared with $210 million in the year-ago quarter.

Cash Position

In 2020, operating cash flow was $6.3 billion compared with $6.9 billion in the prior year. Caterpillar ended 2020 with cash and short-term investments of $9.4 billion compared with $8.3 billion as of 2019 end. Through 2020, the company returned $3.4 billion to shareholders via dividends and share repurchases.

2020 Earnings & Revenues Down Y/Y

Caterpillar reported adjusted earnings per share slumped 42% year over year to $6.56 in 2020 primarily due to the impact of the pandemic. Earnings, however, beat the Zacks Consensus Estimate of $5.44. Including one-time items, the bottom line was $5.46, down 49% from the $10.74 in 2019.

Sales plunged 22% year over year to $41.7 billion from the prior year’s $53.8 billion on account of lower end-user demand amid the pandemic and dealers reducing their inventories by $2.9 billion. The top-line figure beat the Zacks Consensus Estimate of $41.5 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 11.22% due to these changes.

VGM Scores

Currently, Caterpillar has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Caterpillar has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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