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Caterpillar's October Retail Sales Down 17% on Weak Demand

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Caterpillar Inc.’s CAT global retail sales declined 17% in the three-month period ended October 2020 – a slight improvement from slump of 20% in the last month. However, this marks 11th consecutive month of global retail sales decline for the mining and construction equipment behemoth. The company had been bearing the brunt of weak demand due to the U.S-China trade tensions and the COVID-19 pandemic aggravated the scenario.

Digging Deep Into October Numbers

North America fared the worst during October, reporting fall of 28%, followed by EAME and Latin America, which witnessed declines of 15% and 7%, respectively. The Asia Pacific region fared better and delivered growth of 3%.

The Resource Industries segment’s sales declined 29% in October — the 12th straight month of negative growth. Nevertheless, it reflects an improvement from plunge of 31% witnessed in September — the worst performance so far this year. Sales in North America, Latin America, EAME and Asia Pacific were down 44%, 29%, 20% and 14%, respectively.

Sales in the Construction Industries segment were down 13%, a meager improvement from a decline of 15% in September. The segment’s sales have been declining for 11 straight months. Sales in North America and EAME were down 24% and 13%, respectively. Asia Pacific and Latin America reported growth of 9% and 6% in sales, respectively. With this performance, Latin America has maintained its streak of positive growth for three consecutive months, while Asia Pacific segment has been witnessing a positive trend for the past six months.

Sales in the Energy & Transportation segment declined 22%. The segment has been contracting for 13 consecutive months. Sales to Transportation, Industrial, Oil & Gas and Power Generation sectors plunged 38%, 33% and 27%, and 6% respectively.

Weak Demand Weighing on Caterpillar

Lower demand across all segments and geographies, primarily due to the impact of the COVID-19 pandemic, led to 50% slump in the company’s third-quarter earnings. Caterpillar refrained from providing any guidance with the third-quarter results as well, on account of the uncertainty amid the COVID-19 pandemic.

In the early part of the year, Caterpillar had to suspend operations temporarily at certain facilities due to supply chain issues, weak demand or as per government mandates to stem the spread of the coronavirus. Though currently all of the company’s primary production facilities are operational, it may have to suspend operations temporarily again if necessary.

What Lies Ahead

Per the Institute for Supply Management, the index has peaked to 59.3% in September — maintaining a reading above 50 for five straight months, which denotes expansion. This is a major recovery from the low PMI reading of 41.5% in April 2020 primarily due to the COVID-19 crisis. This indicates that the sector seems to be coming out of the woods, on gradual resumption of the global economic activities and reopening of businesses.

In North America, low interest rates and improved homebuilder confidence, and growth in housing starts will support demand for Caterpillar’s construction equipment. In China, the outlook for the construction sector holds promise backed by government spending on infrastructure and building activity. Moreover, with gold and iron prices rallying, and copper also picking up lately, mining companies are likely to resume spending. A pick up in manufacturing and mining sectors will help Caterpillar to post sales recovery.

Also, in the wake of weak demand, Caterpillar has taken initiatives to reduce costs, which will help sustain margins. The company also remains focused on making continued investments in services and expanded offerings, which are crucial to its strategy for profitable growth.

Price Performance

Shares of Caterpillar have gained 19.5% in the past year, compared with the industry’s growth of 18.3%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector include AGCO Corporation AGCO, Crown Holdings, Inc. CCK and iRobot Corporation IRBT. 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.

AGCO has an estimated earnings growth rate of 15.4% for the ongoing year. The company’s shares have soared 87% in a year’s time.

Crown Holdings has a projected earnings growth rate of 11.7% for 2020. The company’s shares have appreciated 52% over the past year.

iRobot has an expected earnings growth rate of 18.9% for the current year. The stock has gained 12% in the past year.

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