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Caterpillar's Machine Sales Growth Drops to 9% in January

Zacks Equity Research

Caterpillar Inc. CAT reported a rise of 9% in global retail sales for the three months ended January 2018, decelerating from improvement of 10% witnessed in December and 16% in November. The company’s global machine sales growth rate chart has been moving south for eight straight months. It has now entered single digits — at levels last witnessed in 2017. Nevertheless, Resource Industries, Construction Industries, and Energy & Transportation continue to report positive gains for the 19th, 24th and 17th consecutive months, respectively.

 

North America Holds Ground, Asia Pacific Disappoints

 

In January, growth was mainly led by North America which logged an increase of 20%. EAME and Latin America have been lagging, with respective sales growth of 5% and 4%, respectively. Sales in Asia Pacific declined 4%, witnessing its first contraction since July 2016. Compared with December, sales growth decelerated across all regions, except for North America.

 

The Resource Industries segment reported growth of 17% in January, lower than the rise of 28% in December. Sales in the North America and Asia Pacific surged 44% and 23%, respectively. Sales in Latin America rose 4% while EAME dipped 9%. Notably, performances across regions worsened from December.

 

Sales growth in the Construction Industries segment went up 7%, a slight improvement from growth of 6% in December but remains way below the highest level of 30% in 2018. Sales increased 15% in North America, 12% in EAME and 4% in the Latin America. Asia Pacific disappointed with a decline of 10% in sales mainly due to the slowdown in demand in China Sales growth improved in North America and Latin America compared with December while EAME and Asia Pacific lagged December performances. 

 

Sales in the Energy & Transportation segment rose 8%, lower than growth of 13% registered in December. Sales growth in the Transportation sector was 23%, followed by the Power Generation which reported sales growth of 16%. The Oil & Gas sector reported sales growth of 4%.  Sales in the Industrial sector declined 4%. The Transportation sector was the only sector which delivered an improved performance in December.

 

Cost Discipline, Investment in Expanded Offerings to Fuel Growth

 

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 ever since, delivering average retail sales growth of 10.3% in 2017 and 23.5% thereafter in 2018.

 

Further, in fourth-quarter 2018, Caterpillar delivered adjusted earnings per share of $2.55, up 18% year over year driven by continued strength in many of its end markets and incessant focus on cost control. Revenues improved 11% year over year to $14.3 billion in the quarter. The quarterly performance marked the company's eighth consecutive quarter of top and bottom-line growth after recording dismal performances for four years.

 

At the end of 2018, Caterpillar’s backlog was at $16.5 billion, a year-over-year improvement $700 million aided by increase in Energy & Transportation and Construction Industries, partially offset by a lower backlog at Resource Industries.

 

For 2019, Caterpillar expects earnings per share to range between $11.75 and $12.75. The mid-point of the guidance depicts year-over-year growth of 9% over the adjusted earnings per share of $11.22 in fiscal 2018. However, the company stated that it expects “modest” sales growth for the year based on the fundamentals of its diverse end markets as well as the macroeconomic and geopolitical environment. The company will nevertheless continue to focus on cost discipline and investment in expanded offerings and services to drive growth.

 

The Zacks Consensus Estimate for earnings in fiscal 2019 is pegged at $12.23, projecting year-over-year growth of 9%. The estimate for revenues for the fiscal is at $57.49 billion, reflecting growth of 5%.

 

 

 

Caterpillar has decreased 16.8% over the past year, against the industry’s decline of 17.6%. 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 and supply chain challenges. However, the company plans to negate these impacts through price increases, utilizing 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 Axon Enterprise, Inc AAXN, Alarm.com Holdings, Inc. ALRM and Mueller Industries, Inc. MLI. These three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Axon has an expected earnings growth rate of 14.5% for 2019. The company’s shares have rallied 89% in the past year.

 

Alarm.com has an expected earnings growth rate of 7.8% for 2019.  The stock has climbed 71% in a year’s time.

 

Mueller Industries has expected earnings growth rate of 2.2% for 2019. Its shares have gained 21% in the past year.

 

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