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Caterpillar's Sales Growth Slips to Lowest Point in October

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For the three-month period ended October 2019; Caterpillar Inc. CAT reported a global retail sales increase of 3% — the lowest so far this year. The company’s global machine sales growth rate chart has been moving south of late and is now trending in single digits — at levels last witnessed in 2017.

In October, growth was primarily led by North America, which witnessed an increase of 9%, followed by Latin America with growth of 4%. Sales in EAME inched up 2% while Asia Pacific witnessed a drop of 9%. Performances deteriorated across all regions compared with September. Notably, Asia Pacific delivered its worst performance so far this year.

Low Points in 2019

The Resource Industries segment reported growth of 7% in October — the lowest so far in 2019. North America reported growth of 32% in October. Sales in EAME remained flat but Latin America and Asia Pacific witnessed declines of 8% and 7%, respectively. Latin America has been performing well so far this year. Notably, it reported growth of 31% in September but slipped into negative territory in October.

Sales growth in the Construction Industries segment inched up 2% — the lowest so far this year. Sales improved 14% in Latin America and 6% in North America. Sales in EAME region rose 3%. Asia Pacific disappointed with a decline of 10% in sales — the worst performance so far this year.
Sales in the Energy & Transportation segment declined 4%, after recording growth of 6% in September. Sales growth in the Industrial sector came in at 18%, followed by the Power Generation and Transportation sectors that reported sales growth of 9% and 6%, respectively. The Oil & Gas sector reported a sales decline of 19%, marking its worst performance in 2019.

Primary Factors Affecting Caterpillar

Last year, Caterpillar witnessed the highest growth rate of 34% in January, which eventually fell to a low of 10% in December. The company’s global machine sales growth rate chart has been in the single digits so far this year — at levels last witnessed in 2017. Caterpillar has logged an average growth rate of 5.8% during the January-October 2019 period, a dismal performance compared with the prior year’s 25.6%.

Though Caterpillar’s sales growth rate has been on a decline, it still remains in the positive territory. Notably, the company had earlier gone through an unprecedented 51-month long stretch of declining sales, which thankfully ended in February 2017. Since March 2017, Caterpillar has reported positive sales growth ever since, delivering an average retail sales growth of 10.3% in 2017 and 23.5% thereafter in 2018.

Caterpillar reported third-quarter 2019 adjusted earnings per share of $2.66, which declined 7% from the prior-year quarter. Revenues declined 6% year over year to $12.8 billion. The company missed the Zacks Consensus Estimate on both counts. The ongoing global economic uncertainty and slowdown in the manufacturing sector resulted in dealers reducing their inventories and impacted sales across all the three segments. Further at the end of the third quarter, the company’s backlog was at $14.6 billion, a sequential decline of $400 million.

For 2019, Caterpillar lowered adjusted earnings per share guidance to $10.59-$11.09 from the prior guidance of $11.75-$12.75. The trimmed guidance reflects lower end-user demand and dealers reducing their inventory. Caterpillar expects modestly lower sales for the year, in contrast to its prior expectation of modest sales growth.
The Zacks Consensus Estimate for earnings in fiscal 2019 is pegged at $10.87, suggesting a decline of 3.1% from the year-ago quarter. The estimate for revenues for the fiscal is at $54.3 billion, calling for a year-over-year drop of 1%.

The U.S.-China trade tensions and waning global demand seems to have taken its toll on the U.S manufacturing sector, which in turn has impacted Caterpillar’s performance. 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.

Price Performance

Caterpillar stock has gained 11.6% over the past year, compared with the industry’s growth of 11.9%.

Zacks Rank & Key Picks

Caterpillar currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Casella Waste Systems, Inc. CWST. While Northwest Pipe and Tennant sport a Zacks Rank #1 (Strong Buy), Casella Waste Systems carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 39% in a year’s time.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 28% over the past year.

Casella Waste Systems has an estimated earnings growth rate of 37.7% for the ongoing year. The company’s shares have gained 34% in the past year.

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