Caterpillar's May Sales Growth of 6% Hits Year's Lowest Point

Caterpillar Inc. CAT reported a rise of 6% in global retail sales for the three-month period ended May 2019 — the lowest so far this year. Nevertheless, Resource Industries, Construction Industries, and Energy & Transportation segments continue to report positive gains for the 23rd, 28th and 21st consecutive months, respectively.

In May, growth was primarily led by Latin America which logged an increase of 16%, followed by North America, with growth of 15%. Sales in EAME dropped 5% and Asia Pacific witnessed a 4% dip. Barring North America and EAME, performances deteriorated across all regions compared with April.

Resource Industries Hold Ground, Construction Disappoints

The Resource Industries segment reported growth of 21% in May — the best performance so far in 2019. Sales in Asia Pacific surged 63% and North America reported growth of 35%. In Latin America, sales growth was 11%, while EAME dropped 18%. Both Asia Pacific and North America delivered improved performances in April.
Sales growth in the Construction Industries segment inched up 2% — the lowest so far this year. Sales increased 20% in Latin America and 11% in North America. Asia Pacific disappointed with a decline of 12% in sales, while EAME sales remained flat. Both Latin America and North America growth rate improved from April. Asia Pacific’s 12% decline has been the worst performance so far this year.
Sales in the Energy & Transportation segment rose 1%. Sales growth in the Power Generation came in at 23%, followed by the Industrial sector, which reported sales growth of 8%. The Oil & Gas sector reported a decline in sales of 13%, while sales to the Transportation sector edged down 1%.

Is There Recovery in Sight?

Last year, Caterpillar witnessed the highest growth rate of 34% in January, which trickled down 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 7.4% during the January-May 2019 period, a dismal performance compared to the prior year’s 29%.

Though Caterpillar’s sales growth rate has been on a downward trend, it still remains in the positive territory. As a reminder, the company had 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.

In first-quarter 2019, Caterpillar’s revenues improved 5% year over year to $13.5 billion.  Caterpillar delivered adjusted earnings per share of $2.94 in the first quarter, up 4% year over year, backed driven by robust top-line performance despite higher manufacturing costs. Further at the quarter’s end, the company’s backlog was at $16.9 billion, a sequential improvement of $300 million.

For 2019, Caterpillar expects earnings per share to range between $11.75 and $12.75. The mid-point of the guidance depicts year-over-year growth of 12% over the adjusted earnings per share of $11.22 in fiscal 2018. The company stated that it expects “modest” sales growth for the year based on the fundamentals of its diverse end markets as well as the macroeconomic and geopolitical environment. The company will, nevertheless, continue to focus on cost discipline and investment in expanded offerings and services to stoke growth.
The Zacks Consensus Estimate for earnings in fiscal 2019 is pegged at $12.25, projecting year-over-year growth of 9.18%. The estimate for revenues for the fiscal is at $57.09 billion, calling for growth of 4.32%.

Increasing commodity prices have been restoring miners’ profitability and these companies are resuming capital spending. This bodes well for the Caterpillar’s Resource Industries segment. Capital spend will increase for both equipment replacement cycles and expansions. For the Construction Industries segment, improvement in residential and non-residential construction in North America, and infrastructure demand will help sustain revenues.
Price Performance

Caterpillar stock has decreased 15.2% over the past year, against the industry’s decline of 16.6%. The recent slowdown in retail sales seems to be weighing the stock down. Further, the recently-imposed tariffs have led to raw material inflation and supply chain challenges. However, the company plans to negate these impacts through price increases, utilizing the Operating & Execution Model to drive operational excellence and structural cost discipline.

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

Some better top-ranked stocks in the Industrial Products sector are Chart Industries, Inc. GTLS, Lawson Products, Inc. LAWS and Harsco Corporation HSC, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart Industries has an estimated earnings growth rate of 52.9% for the ongoing year. The company’s shares have gained 13.8%, in the past year.

Lawson Products has an expected earnings growth rate of 24.5% for the current year. The stock has appreciated 44.4% in a year’s time.

Harsco has a projected earnings growth rate of 9.1% for 2019. The company’s shares have gained 8.9%, over the past year.

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Caterpillar Inc. (CAT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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