Why Is Caterpillar (CAT) Down 10.2% Since Last Earnings Report?

A month has gone by since the last earnings report for Caterpillar (CAT). Shares have lost about 10.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Caterpillar due for a breakout? 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 Tops Q1 Earnings Estimates, Hikes '19 View

Caterpillar delivered adjusted earnings per share of $2.94 in first-quarter 2019, surpassing the Zacks Consensus Estimate of $2.84. The figure improved 4% year over year driven by robust top-line performance despite higher manufacturing costs.
 
Including one-time items, Caterpillar’s earnings per share came in at $3.25 – a record for the first quarter. The figure marked an improvement of 19% over $2.74 in the prior-year quarter.

Revenues Beat Estimates

Revenues improved 5% year over year to $13.5 billion in the quarter under review, outpacing the Zacks Consensus Estimate of $13.4 billion. Sales increased 9%, 8% and 7% in Asia Pacific, Latin America and North America, respectively. EAME was the only region to witness a decline of 6% in revenues.
 
Higher Sales Lead to Improved Profits

In fourth-quarter, cost of sales increased 5% year over year to $9 billion on higher manufacturing costs, due to higher variable labor and burden, including freight costs, and material costs, including tariffs. Gross profit advanced 4% to $4.46 billion. Selling, general and administrative (SG&A) expenses increased 3.4% to $1.3 billion. Research and development (R&D) expenses went down 1.8% year over year to $435 million. Operating profit came in at $2.2 billion, an improvement from the prior-year quarter figure of $2.1 billion.
 
Resource Industries & Construction Deliver Growth
 
Machinery and Energy & Transportation (ME&T) sales rose 5% year over year to $12.7 billion. Sales of Energy & Transportation remained flat at $5.2 billion from the prior-year quarter, as favorable price realization and higher sales volumes were offset by unfavorable currency impact owing to stronger U.S. dollar. Sales at Resource Industries improved 18% year over year to $2.7 billion aided by higher equipment demand and favorable price realization and services. Construction Industries sales rose 3% year over year to $5.9 billion on the back of higher sales volume for construction equipment.
 
The ME&T segment delivered operating profit of $2.1 billion, an improvement of 5% from the year-ago quarter. At the Energy & Transportation segment, operating profit declined 4% to $838 million. Higher sales volume was offset by rising manufacturing costs, including freight costs, increasing warranty expense and slightly higher labor costs.
 
The Resource Industries reported operating profit of $576 million in the first quarter, a surge of 52% from the prior-year quarter thanks to higher sales volume and favorable price realization. However, higher material and freight costs, and increased warranty expenses dented profits. Construction Industries’ profit dropped 3% to $1,085 million due to higher manufacturing costs, partially offset by favorable price realization.
 
Financial Products’ revenues went up 5% to $742 million. Financial Products' profits were $165 million in the reported quarter, up 19% from $139 million in the prior-year quarter.
 
Cash Position
 
Caterpillar ended first quarter 2019 with cash and short-term investments of $7.1 billion, down from $7.9 billion at 2018 end. In the reported quarter, ME&T operating cash flow was $860 million. During the first quarter of 2019, the company repurchased $751 million of its common stock and made dividend payments of $494 million.

Backlog
 
At the end of the first quarter of 2019, Caterpillar’s backlog was at $16.9 billion, a sequential improvement of $300 million aided by increase in Energy & Transportation and Construction Industries, partially offset by a lower backlog at Resource Industries.
 
Guidance Raised
 
For 2019, Caterpillar expects earnings per share to range between $12.06 and $13.06, up from the prior range of $11.75 to $12.75. This is due to 31 cents per share discrete tax benefit related to U.S. tax reform as a result of final regulations recently issued by the U.S. Treasury. The mid-point of the guidance depicts year-over-year growth of 12% over the adjusted earnings per share of $11.22 in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Caterpillar has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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