Report
Scott Pope
EUR 850.00 For Business Accounts Only

Morningstar | Caterpillar Guidance Suggests Future Margin Compression; Shares Under Review on Likely FVE Reduction

Caterpillar shares declined nearly 10% after the company reported fourth-quarter adjusted EPS of $0.44, 15% below consensus estimates. The main contributor to the miss was lower operating margin in construction industries. Management also shared its 2019 GAAP EPS guidance of $11.75 to $12.75, which was below our estimate of $12.81. As we incorporate information from the quarterly report and update our margin assumptions, we are putting Caterpillar shares under review because we anticipate a reduction in our fair value estimate that may exceed 10%.

The performance of the construction industries segment during the quarter was the biggest disappointment. While revenue grew approximately 8% year over year, operating margin declined to 14.8% from 15.8%, well below our estimate of 20.7%. Issues cited for the margin decline included weak demand in Latin America and the Middle East. At the same time, freight and materials costs were elevated. Consistent with our research, management was upbeat on U.S. construction activity for 2019.

Caterpillar's resource industries segment maintained its upward growth trajectory, increasing revenue 21% year over year, and segment operating margin increased to 14.3% from 9.1%. Mining customers continued to invest in capital equipment as commodity prices remain supportive. Management remained positive about its 2019 outlook for the segment due to ongoing reductions in customers’ idle assets. Additionally, there are early indications of strong demand for quarry and aggregate machinery.

Caterpillar’s energy and transportation segment also showed healthy growth in the quarter. Revenue increased 11% year over year, while operating margin increased to 17.2% from 15.5% in the year-ago period. Strong power generation sales, especially to data centers, contributed to the segment’s performance. Rail service revenue also increased. A strong U.S. economy and robust demand for gas compression equipment are likely to boost 2019 segment revenue 2019.

Our outlook for Caterpillar remains positive despite the quarterly earnings miss. For the year, management was able to deliver record GAAP EPS of $10.26 per share even with revenue nearly 18% below its 2012 peak, when GAAP EPS was $8.73. This demonstrates the progress of management’s restructuring efforts, which are largely complete. Caterpillar has introduced several innovative products in recent months, including an electric-drive dozer with 35% better fuel economy. Caterpillar’s autonomous mining trucks reached a milestone during the quarter, having hauled over 1 billion tons of materials. Many of Caterpillar’s product categories, including sales of new locomotives, are well below midcycle sales levels. We believe that Caterpillar’s ability to introduce products with the lowest total cost of ownership, while containing its own costs, will foster profitable growth and enhance its ability to return cash to shareholders.
Underlying
Caterpillar Inc.

Caterpillar is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company segments include: Construction Industries, which supports customers using machinery in infrastructure, forestry and building construction; Resource Industries, which supports customers using machinery in mining, heavy construction, quarry and aggregates, waste and material handling applications; Energy and Transportation, which supports customers in oil and gas, power generation, marine, rail and industrial applications, including Cat? machines; and Financial Products, which provides financing and related services.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Scott Pope

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