Caterpillar (CAT) Withdraws Guidance On Coronavirus Concerns

Caterpillar Inc. (NYSE:CAT) recently withdrew its guidance for 2020 on account of the coronavirus outbreak. The company also announced that its supply chain has been disrupted owing to the coronavirus crisis. Further, it is temporarily suspending operations at certain facilities on account of weak demand and restrictions imposed by governments to contain the spread of the virus.

First detected in China, the coronavirus rapidly spread across the world and has been declared a pandemic. Per the World Health Organization’s situation report as of Mar 26, 2020, global affected coronavirus cases has shot up to 462,684, claiming 20,834 lives.

Supply Chain Impacted

Caterpillar stated that the coronavirus pandemic has impacted its supply chain. The company is monitoring the situation and supply chain teams have been executing business continuity plans. These options include, using alternative sources, air freight, rerouting orders to other distribution centers, while prioritizing the redistribution of the most impactful parts.

Few Facilities Suspended

Due to weak demand on account of uncertain economic conditions, potential supply constraints and government actions to curb the spread of the virus, Caterpillar is temporarily suspending operations at certain facilities. However, the company continues to run majority of its domestic operations and plans to continue operating in rest parts of the world, as permitted by local authorities. However, the company added that it may suspend operations at additional facilities if the situation warrants.

2020 Guidance Withdrawn

During its fourth-quarter 2019 conference call, Caterpillar had issued earnings per share guidance of $8.50-$1.00 for 2020. The mid-point of the guidance indicates a fall of 16% from the adjusted earnings per share of $11.06 reported in 2019. Caterpillar had then cautioned that end user demand would be down by about 4% to 9% thanks to the trade war tensions. Dealers were anticipated to reduce inventories by about $1 billion to $1.5 billion, due to the ongoing global economic uncertainty. The company has now withdrawn this guidance, citing that the uncertainty of the impact of the outbreak on its financial and operating results cannot be reasonably estimated at this time.

Taking Precautionary Measures

Caterpillar added that the company is taking all necessary steps to protect the safety, health and well-being of employees, customers, dealers, suppliers and communities. Preventive measures taken by the company include increased cleaning and disinfecting of facilities, advocating remote working when possible, restricting business travel, cancellation of certain events and limitations on visitor access to facilities and practicing social distancing.

Over the past year, shares of Caterpillar have plunged 16.6% compared with the industry’s decline of 22.9%.

The coronavirus outbreak has dealt a further blow to the manufacturing sector, which was already reeling under the protracted U.S.-China trade tensions and waning global demand. The U.S Purchasing Managers’ Index (PMI) released by the Institute for Supply Management had been below 50 (indicating contraction) for five consecutive months till December 2019. Even though the index climbed to 50.9 in January and came in at 50.1 in February, it seems unlikely that this recovery will stay, considering that manufacturing has been impacted by the coronavirus outbreak. Factory closures across the globe, impact of the restrictions imposed by different governments, supply chain disruptions, low demand for goods, availability of employees and workers, logistic costs, among others will hit the sector.

There has been a spate of guidance withdrawals by the industry players lately. Terex Corporation (NYSE:TEX) , another player in the manufacturing and construction industry withdrew its guidance for 2020 and announced that it has suspended all share repurchases. Earlier this week, agricultural and construction equipment manufacturer, Deere & Company (NYSE:DE) withdrew its financial outlook for 2020 citing the COVID-19 outbreak. Another farm equipment maker, AGCO followed suit and withdrew its financial guidance for the current year. Production has been suspended in many of the company’s European facilities, primarily due to supply-chain constrains and material shortage. Additional production disruptions in other regions are expected as well.

Zacks Rank & a Stock to Consider

Caterpillar carries a Zacks Rank #4 (Sell).

A better-ranked stock in the Industrial Products sector is Sharps Compliance Corp (NASDAQ:SMED) , which currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Sharps Compliance has an estimated earnings growth rate of 800% for 2020. In a year’s time, the company’s shares have gained 57%.

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