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Caterpillar Loses Momentum as 1st-Quarter Volumes Decrease

The construction equipment company is strengthening liquidity to offset slow sales

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Margaret Moran
Apr 28, 2020
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On April 28 before the market opened, Caterpillar Inc. (

CAT, Financial) reported its earnings results for the first quarter of 2020. The construction equipment company’s revenue and net income were lower than Refinitiv analysts' estimates as it struggled to keep operations going. Shares dipped 4% following the news before bouncing back up to $115.90 in intraday trading.

Revenue for the quarter came in at $10.6 billion, which is lower than analyst estimates of $10.9 billion and represents a 21% decline compared to the prior-year quarter. Breaking down the results, the company reported that $2.6 billion of this loss was due to lower sales volumes, with a $137 impact from unfavorable currency conversions and smaller losses from price realization and financial products. Dealers only increased their inventories by approximately $100 million compared to $1.3 billion in the prior-year quarter.

For earnings per share, Caterpillar reported a per-share profit of $1.98, which represented a 39% decline from the prior-year quarter. Adjusted earnings of $1.60 per share, which excludes the impact of a non-U.S. pension obligation, was lower than analyst estimates of $1.69.

Quarter highlights

Caterpillar’s operations were deemed essential by many governments, allowing the company to stay at work to support infrastructure. As Chairman and CEO Jim Umpleby said, “Our employees deliver products and services that enable our customers to provide critical infrastructure essential to support society during the Covid-19 pandemic.”

However, the company ended up suspending operations at some facilities anyway due to weakening demand, supply chain issues and government restrictions. By mid-April, 75% of the company’s primary production facilities continued to operate.

With sales dropping and the operating profit margin declining to 13.2% from 16.4% in the prior-year quarter (which is still much higher than the industry median of 6.29%), Caterpillar has taken measures to increase its liquidity position and cut costs. The company has paused the issuing of stock options for executive compensation plans, suspended 2020 base salary increases and reduced discretionary costs. It ended the quarter with $7.1 billion in cash and $10.5 billion in available credit.

Valuation

As of April 28, Caterpillar has a market cap of $65.04 billion. Using earnings from the fourth quarter of 2019, we get a price-earnings ratio of 10.88, but the forward price-earnings ratio of 20.58 tells us that the stock’s valuation may be more in line with first-quarter earnings.

As a company whose primary businesses are in construction, Caterpillar is highly cyclical. According to the chart below, sales declined in every previous recession as governments and companies slowed down their infrastructure and building activities.

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Outlook

As most U.S. companies are doing, Caterpillar has declined to provide 2020 guidance due to the uncertain economic situation.

“We have taken decisive actions to enhance our strong financial position, while continuing to execute our strategy for profitable growth,” Umpleby commented. “Caterpillar has faced and overcome many challenges in our 95-year history. Our goal is to emerge from the pandemic an even stronger company.”

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

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