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Why Is Caterpillar (CAT) Up 5.1% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Caterpillar (CAT). Shares have added about 5.1% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Caterpillar due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Caterpillar Q2 Earnings & Revenues Surpass Estimates

Caterpillar reported second-quarter 2020 adjusted earnings per share of $1.03, which beat the Zacks Consensus Estimate of $1.77 by a margin of 56%. However, the bottom line plunged 64% from the prior-year quarter’s adjusted earnings per share of $2.83.

The disappointing performance was mainly due to lower demand across all segments and geographies. The company also did not provide any guidance for 2020 and stated that results for the remainder of the year will bear the impact of the coronavirus pandemic.

Including pre-tax remeasurement losses of 19 cents per share resulting from the settlements of pension obligations, Caterpillar’s earnings per share came was 84 cents in second-quarter 2020, reflecting a decline of 70% from the prior-year quarter figure of $2.83.

Low Demand a Drag on Revenues

The company’s second-quarter revenues of $10 billion surpassed the Zacks Consensus Estimate of $9.2 billion. Nevertheless, the top line figure suffered a decline of 31% on lower sales volume. This was mainly due to low end-user demand amid the coronavirus pandemic and the impact from changes in dealer inventories. Dealers lowered machine and engine inventories about $1.4 billion during the reported quarter against an increase of about $500 million during the prior-year quarter.

The company witnessed decline in sales across the board. Sales in Latin America plunged 41% followed by a decline of 40% in North America. Sales in Asia Pacific and EAME were both down 17%.

Margins Dip on Lower Sales Volume

In second-quarter 2020, cost of sales decreased 28% year over year to $7.1 billion. Manufacturing costs were favorable aided by lower period manufacturing costs. Gross profit contracted 36% to $2.9 billion on lower sales. Gross margin was 28.8% in the reported quarter, down from 31.1% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses decreased 10% to around $1.18 billion. Research and development (R&D) expenses declined 23% to $341 million from the prior-year quarter figure of $441 million. Both SG&A and R&D expenses in the quarter benefited from reduced short-term incentive compensation expense and other cost reductions related to lower sales volumes.

Operating profit in the quarter was $784 million, marking a slump of 65% from the prior-year quarter.  Lower sales volume and unfavorable price realization, partially offset by favorable manufacturing costs and reduced SG&A and R&D expenses led to lower operating profits in the quarter. Operating margin was 7.8% in the reported quarter, down 750 basis points from the prior-year quarter.

Segment Performances Dented By Weak Demand

Machinery and Energy & Transportation sales tanked 32% year over year to $9.3 billion. Construction Industries sales slumped 37% year over year to $4 billion owing to lower sales volumes on account of lower end-user demand and the impact from changes in dealer inventories.

Sales at Resource Industries declined 35% year over year to around $1.8 billion lower sales volume, owing to changes in dealer inventories and lower end-user demand. Demand for equipment supporting non-residential construction and quarry and aggregates was impacted in the quarter and spending on mining equipment was muted due to lower commodity prices. Sales of Energy & Transportation segment in the quarter were $4.1 billion, reflecting a decline of 24% from the prior-year quarter on account of lower sales across all applications.

The ME&T segment reported operating profit of $749 million, reflecting a slump of 66% from the year-ago quarter. The Resource Industries segment’s operating profit fell 68% year over year to $152 million in second-quarter 2020. Construction Industries segment’s profit witnessed a year-over-year decrease of 58% to $518 million. The Energy & Transportation segment’s operating profit declined 30% year over year to $624 million.

Financial Products’ revenues went down 10% to $687 million from the prior-year quarter. Financial Products' profits were $110 million in the reported quarter, down 23% from $143 million in the year-ago quarter.

Cash Position

For the first half of 2020, operating cash flow was $2.5 billion compared with $3.7 billion in the prior-year comparable period. Caterpillar ended second-quarter 2020 with cash and short-term investments of $8.8 billion and available liquidity sources of $18.5 billion. In July, Cat Financial issued $1.5 billion of new three-year and 18-month medium-term notes to supplement its liquidity position.

Other Updates

Caterpillar stated that nearly all of its primary production facilities are operational currently. It has been taking actions to reduce costs, which will help sustain margins amid a weak demand backdrop. The company remains focused on making continued investment in services and expanded offerings, which are crucial to its strategy for profitable growth.

Earlier, on Mar 26, 2020 Caterpillar had withdrawn guidance for 2020 due to the uncertainty related to the impact of the pandemic. The company has not provided any guidance with this quarterly release as well.  However, it cautioned that its financial results for the remainder of 2020 will bear the impact of the persistent global economic uncertainty due to the COVID-19 pandemic.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -16.34% due to these changes.

VGM Scores

Currently, Caterpillar has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Caterpillar has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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