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Caterpillar (CAT Free Caterpillar Stock Report) beat profit expectations for the fourth quarter of 2019, but the shares were down modestly in value after the manufacturer of heavy equipment reported a sales miss and issued a disappointing 2020 outlook. Lower-than-expected user demand led to an 8% year-over-year sales decline, to $13.14 billion, which fell short of our $13.32 billion estimate. The weakness was spread across all three operating units. Furthermore, the uncertain global economy led dealers to lower their machine and engine inventories by $700 million during the period, with much of these actions hurting the Construction Industries and Resource Industries divisions.

Earlier-implemented cost controls, though, more than offset the top-line softness, resulting in a reported operating profit margin of 14.1% (compared to 13.1% in the same period last year). Altogether, adjusted profit per share of $2.63 expanded a modest 3% over the prior-year tally and eclipsed our call of $2.42.

For the full 12 months, Caterpillar registered a year-over-year sales decline of 2%, to $53.80 billion, and a share-net decrease of 1%, to $11.06.

There are some dark clouds hovering over the global economy in 2020. Although phase one of the U.S./China trade deal was supposed to alleviate pressure on the overall business environment, and strong global economic expansion was anticipated, management has assumed a cautious stance with its guidance for 2020. Specifically, Caterpillar expects continued global economic uncertainty to pressure sales to users, and cause dealers to further reduce inventories. But management stated that it is prepared to respond quickly to any positive or negative changes in customer demand. For full-year 2020, the company looks for share profits to be in a range of $8.50 to $10.00, which is well below consensus expectations and our prior call of $10.75. All told, due to persistently weak end-market conditions, we have revised downward our top- and bottom-line estimates by $1.10 billion and $0.75 a share, to $51.50 billion and $10.00, respectively. Note that Caterpillar turned the page on 2019 with a backlog of $13.7 billion, which was down a whopping $2.9 billion since the end of 2018.

Meantime, the full impact of the Coronavirus on business in general, and the company in particular, is not clear, but the implications are negative. The expected revival in China's economy this year was supposed to lead to increased overall demand for metals like iron ore, copper, and oil, which, in turn, would have boosted business for Caterpillar's line-ups of mining and oil & gas exploration equipment. But the Coronavirus outbreak has caused us to look ahead with a more cautious eye.

Recent price weakness in Caterpillar stock presents an attractive entry point for buy-and-hold accounts.


About The Company: Caterpillar Incorporated is the world’s largest producer of earth-moving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks.  

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.