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Key Takeaways from Caterpillar's Latest Results

GuruFocus.com
·3 min read

- By Mayank Marwah

Caterpillar Inc. (NYSE:CAT) released its third-quarter 2020 results before the opening bell on Oct. 27. The heavy equipment manufacturer posted earnings and revenue that exceeded Wall Street's estimates as cost-cutting initiatives helped negate poor end-user demand.

A look at the quarter

The Deerfield, Illinois-based company recorded adjusted earnings per share of $1.34, down roughly 50% as compared to the prior-year quarter. Analysts had predicted earnings of $1.18 per share. Revenue of $9.9 billion tumbled 22.55% on a year-over-year basis, but surpassed expectations of $9.8 billion.


Operating profit amounted to $985 million, down 51% from the same period last year thanks to lower sales volume and unfavourable price realization. This was partially compensated by lower selling, general and administrative (SG&A) expenses and research and development expenses.

Chairman and CEO Jim Umpleby commented:


"Our third-quarter results largely aligned with our expectations, and we're encouraged by positive signs in certain industries and geographies. We're executing our strategy and are ready to respond quickly to changing market conditions."



The company exited the quarter with $9.3 billion of enterprise cash. In addition, the company had more than $14 billion of available credit lines.

Segment performance

Sales in the Energy and Transportation division stood at $4.16 billion, down 24% from the prior year. Within the segment, the oil and gas and power generation segments witnessed slumps in sales. The operating profit dropped 52% in the second quarter to $492 million.

Resource Industries' sales dipped 21% to $1.82 billion on low demand for both mining and heavy construction equipment. The operating profit amounted to $167 million, which reflected a decrease of 46% year-over-year as lower manufacturing and research and development expenses could not offset lower sales volume and unfavorable price realization.

Construction Industries' sales were $4.06 billion, down 23% on account of weak sales volume. Operating profit came in at $585 million, which reflected a decline of 38%.

Geographically, consolidated sales were down 8% in Asia Pacific, 30% in North America, 36% in Latin America and 14% in the Europe, Africa and Middle East (EAME) segment.

The industrial giant said that the primary production facilities across all its three main segments are now functioning. However, some facilities are running at reduced capacities.

In view of trimming costs, the company has also held back on increasing annual salaries as well as bonuses for many employees and senior executives.

Conclusion

Caterpillar, a bellwether for economic development, has been experiencing business slowdown on account of the pandemic and the U.S.-China trade feud. Sales of mining trucks, bulldozers and other equipment have softened as buyers are postponing capital expenditure.

Nonetheless, a fast economic recovery in China coupled with a rise in residential activity in North America is expected to boost retail sales in the fourth quarter.

Disclosure: I do not hold any positions in the stocks mentioned.

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This article first appeared on GuruFocus.