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Caterpillar (CAT) Q3 Earnings & Revenues Surpass Estimates

Zacks Equity Research
·5 min read

Caterpillar Inc. CAT reported third-quarter 2020 adjusted earnings per share of $1.34, which beat the Zacks Consensus Estimate of $1.15 by a margin of 17%. However, the bottom line plunged 50% from the prior-year quarter’s adjusted earnings per share of $2.66 as demand remained weak across all segments and geographies. The construction and mining equipment behemoth has been bearing the brunt of the prolonged U.S.-China trade standoff and the coronavirus pandemic, which resulted in customers delaying their capital spending.

Including remeasurement losses of 12 cents per share thanks to the settlements of pension obligations, Caterpillar’s earnings per share came was $1.22 in third-quarter 2020, reflecting a decline of 54% from the prior-year quarter figure of $2.66.

Revenues Impacted by Weak Demand Across All Regions

The company’s third-quarter revenues of $9.9 billion surpassed the Zacks Consensus Estimate of $9.7 billion. However, the top line declined 23% 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 Latin America plunged 36% followed by a decline of 30% in North America. Sales in EAME and Asia Pacific were down 14% and 8%, respectively.

Caterpillar Inc. Price, Consensus and EPS Surprise

Caterpillar Inc. Price, Consensus and EPS Surprise
Caterpillar Inc. Price, Consensus and EPS Surprise

Caterpillar Inc. price-consensus-eps-surprise-chart | Caterpillar Inc. Quote

Margins Dip on Lower Sales

In third-quarter 2020, cost of sales decreased 19% year over year to $6.9 billion. Manufacturing costs were favorable in the quarter aided by lower period manufacturing costs and other cost-reduction actions implemented in response to lower sales volumes. Gross profit slumped 29% year over year to $2.96 billion on lower sales. Gross margin contracted 280 basis points to 30% from the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 10% to around $1.1 billion. Research and development (R&D) expenses declined 20% to $344 million from the prior-year quarter figure of $431 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.

Operating profit in the quarter plunged 51% year over year to $985 million primarlily dragged down by lower sales volume, unfavorable price realization and reduced profit from financial products. Gains from favorable manufacturing costs, reduced SG&A and R&D expenses were not adequate to mitigate this impact. Operating margin was 10% in the reported quarter, down 580 basis points from the prior-year quarter.

All Segments Bear the Brunt of Weak Demand

Machinery and Energy & Transportation (ME&T) sales tanked 23% year over year to $9.2 billion. Construction Industries sales were down 23% year over year to $4 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 21% year over year to around $1.8 billion on lower sales volume, primarily owing to lower end-user demand. Demand for equipment supporting non-residential construction and quarry and aggregates and mining were reported to be lower in the quarter under review.

Sales of Energy & Transportation segment in the quarter were around $4.2 billion, reflecting a decline of 24% from the prior-year quarter. The downside was on account of lower sales across all applications.

The ME&T segment reported operating profit of $925 million, reflecting a slump of 51% from the year-ago quarter. The Resource Industries segment’s operating profit fell 46% year over year to $167 million in third-quarter 2020. Construction Industries segment’s profit witnessed a year-over-year decline of 38% to $585 million. The Energy & Transportation segment’s operating profit plunged 52% year over year to $492 million.

Financial Products’ revenues went down 17% to $653 million from the prior-year quarter. Financial Products' profits were $127 million in the reported quarter compared with $239 million in the year-ago quarter.

Cash Position

For the first nine-month period of 2020, operating cash flow was $4.3 billion compared with $4.5 billion in the prior-year comparable period. Caterpillar ended third-quarter 2020 with cash and short-term investments of $9.3 billion and available liquidity sources of more than $14 billion.

Earlier, on Mar 26, 2020 Caterpillar had withdrawn guidance for 2020 due to the uncertainty related to the impact of the pandemic. The company has not provided any guidance with this quarterly release as well.

Price Performance

Year to date, Caterpillar stock has gained 10.5%, compared with the industry’s rally of 12.8%.

Zacks Rank & Stocks to Consider

Caterpillar currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Crown Holdings, Inc. CCK, Pentair plc PNR and Worthington Industries, Inc. WOR. All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Crown Holdings has a projected earnings growth rate of 11.7% for fiscal 2020. Year to date, the company’s shares have appreciated 22%.

Pentair has an estimated earnings growth rate of 2% for the ongoing year. The company’s shares have rallied 10% so far this year.

Worthington has an expected earnings growth rate of 19% for 2020. The stock has soared 16% year to date.

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