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Caterpillar Falls As Dismal Q3 Earnings Reflect Weak Demand

support@smarteranalyst.com (Ben Mahaney)
·2 min read

Shares of Caterpillar fell 3.2% on Tuesday October 27 despite the company reporting better-than-anticipated results for the third quarter. Investors were disappointed with the significant decline in the company’s earnings due to weak demand amid the COVID-19 pandemic.

Industrial machinery maker Caterpillar’s (CAT) 3Q adjusted EPS declined 50% year-over-year to $1.34, but the figure was ahead of analysts’ $1.18 forecast.

Revenue declined about 23% to $9.88 billion, due to lower end-user demand for equipment and services and the impact of a decrease in dealer inventories. Analysts expected revenue of $9.80 billion.

The pandemic had a significant impact on Caterpillar’s business, and caused a revenue decline across all of its divisions and geographies as well. Notably, revenue from the Construction Industries, Resource Industries and Energy & Transportation segments declined 23%, 21% and 24%, respectively. (See CAT stock analysis on TipRanks)

Caterpillar did not provide any guidance for 4Q or the full-year but stated that it expects sales and end-user demand to improve sequentially in the fourth quarter. On the conference call, the company disclosed that dealers reduced their inventories by $600 million in 3Q and by $1.8 billion year-to-date. It now expects dealers to bring down their inventories by about $2.5 billion by year-end.

Oppenheimer analyst Noah Kaye reiterated a Hold rating following the earnings release, saying, “While we believe the probable lapping of FY20’s $2.5B dealer inventory reduction headwind was well-understood, management was also incrementally constructive on recovery in mining and North American construction, and noted higher-than-typical inventory levels as reflective of confidence in an upturn.”

“Our revised estimates contemplate FY21 revenues comparable to FY17, with a flatter subsequent recovery in FY22, but better margin performance vs. past periods as CAT continues to benefit from O&E [Operating & Execution] model implementation. Still, at 16x our revised FY22 EPS estimate, we believe current valuation has contemplated these factors, and remain sidelined,” Kaye added.

Caterpillar scores a Moderate Buy analyst consensus from the Street based on 6 Buys, 8 Holds and 1 Sell. With shares rising about 7% year-to-date, the average analyst price target of $158.57 reflects that the shares are fully priced at current levels.

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