Breaking News
Investing Pro 0
🚨 Our Pro Data Reveals the True Winner of Earnings Season Access Data

Caterpillar’s ‘Earnings Recession’ Points to More Bad News for World Economy

Stock Markets Oct 22, 2019 08:17AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
DJI
-0.38%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CAT
+1.17%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GS
+0.13%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MS
+0.22%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

(Bloomberg) -- A bellwether of the global industrial economy may be sending out distress signals.

Caterpillar Inc. (NYSE:CAT) is heading for a “mild earnings recession,’’ according to Morgan Stanley (NYSE:MS), and analysts expect the heavy-equipment maker to post its first year-over-year decline in quarterly profit since 2016 when it reports results on Wednesday.

Margins are shrinking as demand cools and the U.S.-China trade war fuels caution among customers. Machine sales have slipped in Asia and the U.S. on weaker orders in construction industries, just as the Deerfield, Illinois-based company has been trying to raise prices. That helps explain why analysts have pared the earnings outlook five times since August.

The following charts show why Caterpillar’s earnings report could bring more bad news for the world economy.

Machinery Meter

In June, worldwide machinery sales for Caterpillar grew at the slowest pace in more than two years on a 3-month rolling, year-over-year basis. The company posted the same increase in July and August. The sluggishness is largely due to a slowdown in North America, its largest market, and declining market share in China. Sales in North America expanded at the weakest rate in almost two years in August, and in Asia contracted the most since 2016.

Last week, the International Monetary Fund made a fifth straight cut to its 2019 global growth forecast, citing a broad deceleration across the world’s largest economies as trade tensions undermine the expansion. The forecast for this year would be the weakest since 2009, when the world economy shrank.

Lots on Dealer Lots

With concern over the sales outlook, the amount of equipment available on sellers’ lots has been in the spotlight all year. The company said in July that dealer machine and engine inventories increased about $500 million in the three months through June, compared with an increase of about $100 million in the same period a year earlier. It’s been counting on dealers working through the buildup to help meet 2019 profit targets. But analysts at William Blair & Co., who pared their earnings forecast on Oct. 7, said dealer inventories are instead rising and more production cuts may be needed.

Caterpillar isn’t alone. Manufacturers of durable goods in the U.S. had enough inventory to last 1.69 months in August, the longest since November 2016, according to the Census Bureau.

Stock Figures

Concern over the economic outlook and its impact on demand is showing up in analysts’ share-price targets. The rolling 12-month forecast for Caterpillar’s stock is down about 18% from the same time a year ago. Goldman Sachs Group Inc (NYSE:GS). trimmed its 2019-2021 earnings per share estimates by 4% on average. The bank said it expects earnings before interest and taxes to decline year-over-year in 2020, driven by “meaningful production cuts in North America and China construction equipment, while mining demand remains tepid given widespread macro uncertainty.”

The stock-price outlook could get help from a resolution in the trade war and further cuts in interest rates among central banks, Larry De Maria, an analyst at William Blair, said in his report earlier this month. But the uncertainty going into a U.S. election year, generally weaker industrial economy, and cyclical construction equipment markets should ultimately override those potential positives, limiting upside, he said.

Softening the Blow

To be sure, there are bright spots for Caterpillar. Earnings are still forecast to reach a record this year, and much of the bad news may already be reflected in the share price. The stock has risen about 4% in 2019, trailing the 15% gain in the Dow Jones Industrial Average. Also, mining-equipment demand has held up, and should help soften the blow from a slowdown in construction, according to Karen Ubelhart, an analyst at Bloomberg Intelligence.

“Mining equipment should lead segment growth, yet is only 15-20% of sales and earnings,” Ubelhart said in a note last week. When Caterpillar reports earnings, “commentary on China will remain a focus, as will significant deceleration in North American construction equipment demand. ”

Caterpillar’s ‘Earnings Recession’ Points to More Bad News for World Economy
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email