ii view: Caterpillar sales fall off the tracks

Shares for this cyclical bellwether are up over 70% since late March. Too fast, too soon?

Third-quarter results to 30 September  

• Revenue down 23% to $9.9 billion
• Earnings per share down 54% to $1.22
• Quarterly dividend of $1.03 per share

Chief executive Jim Umpleby said:

“I’m proud of our global team’s performance as we continue to safely navigate the pandemic while remaining firmly committed to serving our customers. 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.”

ii round-up:

Heavy industrial equipment maker Caterpillar (NYSE:CAT) has reported a halving in earnings as sales fell across all regions and product categories due to lower end-user demand during the pandemic.

The company, almost 100 years old, manufacturers goods from construction and mining vehicles to diesel engines and electric locomotives. Quarterly earnings per share fell 54% year-over-year to $1.22, although they did just beat Wall Street expectations at a little under $1.20 per share, and that was an improvement on the 70% slump suffered in the second quarter. 

Caterpillar shares fell by around 2% after the results having gained by more than 70% since virus induced late March lows. Shares for fellow heavy equipment maker Deere & Co (NYSE:DE) and hand tools maker Stanley Black & Decker (NYSE:SWK) have more than doubled over the same time. 

Energy and transportation sales fell the most, down 24%, followed by construction-related sales with a fall of 23%, and then mining off 21%. Changes in dealer inventories also feed into the mix, with inventories being reduced more than in the third quarter 2019. 

Cash on the balance sheet of $9.3 billion compared to a sum of $8.8 billion at the end of the prior second quarter. 

In early October, Caterpillar agreed to buy the oil and gas equipment division of Weir Group (LSE:WEIR) for $405 million (£312 million). It previously declared a quarterly dividend of $1.03 per share, unchanged on the previous five quarters. 

ii view:

A constituent of the Dow Jones 30 index, Caterpillar helps its customers pave roads, mine essential commodities and extract fuels to satisfy global energy demand. It employs over 100,000 people with nearly 60% of its sales made outside the US in 2019. 

Its network of 165 dealers serves over 190 countries. Construction equipment accounts for its largest slug of sales, followed closely by energy and transportation and then mining and product finance. 

For investors, a dividend yield in the region of 2.5% (not guaranteed) is not to be ignored, especially when it is sat on a record of quarterly payments every year since 1933. Both product and geographical diversity add to the positives, while some easing in the earnings slump from the previous pandemic high is also noteworthy. But with the share price having already rallied hard from March lows, and virus cases in both Europe and the US back on the rise, a dose of investor caution looks wise.  

Positives: 

• Product and geographical diversity
• Long record of continued yearly dividend payments 

Negatives:

• Uncertain Covid clouded outlook
• Operating profit margin of 10% down from 15.8% in Q3 2019

The average rating of stock market analysts:

Buy