Caterpillar July Retail Sales Up 4%, Resource Industries Peaks

Caterpillar Inc. CAT reported a rise of 4% in global retail sales for the three-month period ended July 2019 — the lowest so far this year. The company’s global machine sales growth rate chart has been moving south of late and has now entered single digits — at levels last witnessed in 2017.

In July, growth was primarily led by Latin America, which exhibited an improvement of 20%, followed by North America with growth of 9%. However, these performances were offset by dismal performances in Asia Pacific and EAME with a decline of 6% and 1%, respectively. Latin America and EAME were the only regions that delivered improved performances from June.

Resource Industries Improves, Construction Disappoints

The Resource Industries segment reported growth of 24% in July — the best performance so far in 2019. Sales in Asia Pacific, Latin America and North America improved 50%, 48% and 36%, respectively. EAME was the only region to witness a sales decline of 16%. While performance deteriorated across all regions from June, Latin America fared well. In fact, Latin America registered its peak sales growth so far this year in June.

Sales growth in the Construction Industries segment was down 1% — its first decline since January 2017. Sales increased 8% in Latin America, 5% in EAME and 4% in North America. Asia Pacific disappointed with a decline of 18% in sales. Notably, this was Asia Pacific’s worst performance so far this year.
Sales in the Energy & Transportation segment rose 6%. The Power Generation sector, the Industrial sector and the Oil & Gas sector reported sales growth of 17%, 16% and 3%, respectively. Sales in the Transportation sector plunged 23%.
Cost Discipline Will Help Sustain Margins
Though Caterpillar’s sales growth rate has been on a downward trend, it remains in the positive territory. As a reminder, the company witnessed a rise of 1% in machine retail sales in March 2017, which put an end to its unprecedented 51-month long stretch of declining sales. The company has reported positive sales growth since. It has an average retail sales growth of 10.3% in 2017 and 23.5% in 2018. So far this year, the company’s retail sales growth has averaged 6.4%.
Caterpillar reported second-quarter 2019 adjusted earnings per share of $2.83 despite year-over-year growth of 3% in revenues to $14.4 billion. The company fell short of the Zacks Consensus Estimate on both counts. Higher manufacturing costs, lower construction equipment sales in Asia-Pacific owing to China and weak sales at the company’s energy and transportation segment weighed on the results.

For 2019, Caterpillar expects earnings per share to be at the lower end of its guidance of $12.06-$13.06. However, the company stated that it expects “modest” sales growth for the year based on the fundamentals of its diverse end markets, and the macroeconomic and geopolitical environment.

In the Construction Industries segment, residential and non-residential construction demand will drive sales in Latin America. The region will continue on its recovery path, but demand will remain relatively low. Though demand remains steady in EMEA, political and economic uncertainties remain. In Asia Pacific, regions barring China are expected to grow.

The Resource Industries segment is expected to continue to perform well in the coming quarters as increasing commodity prices is supporting capital investment in the mining sector. Moreover, demand for heavy construction, and quarry and aggregate equipment is likely to remain strong.

The Zacks Consensus Estimate for earnings in 2019 is pegged at $11.72, suggesting year-over-year growth of 4.5%. The estimate for revenues for the ongoing year is $56.01 billion, indicating an improvement of 2.35% from the year-ago reported figure.

Caterpillar has fallen 9.8% over the past year, compared with the industry’s decline of 13.4%. The recent slowdown in retail sales seems to be weighing on the stock. Further, the company has to contend with raw material cost inflation owing to the imposition of tariffs. However, the company plans to mitigate these impacts through price increases, implementation of the Operating & Execution Model to drive operational excellence, and structural cost discipline. Further, additional investments in expanded offerings and services will drive growth.
Caterpillar currently carries a Zacks Rank #3 (Hold).
Stocks to Consider

A few better-ranked stocks in the Industrial Products sector are Zebra Technologies Corporation ZBRA, Unifirst Corporation UNF and Cintas Corporation CTAS. While Zebra Technologies and Unifirst flaunt a Zacks Rank #1 (Strong Buy), Cintas carried a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zebra Technologies has expected earnings growth rate of 16.71% for 2019. Its shares have gained 28% in the past year.

Unifirst has an expected earnings growth rate of 15.17% for 2019.  The stock has climbed 10% in a year’s time.

Cintas has expected earnings growth rate of 11.15% for 2019. Its shares have gained 26% in the past year.

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