Why Did Caterpillar’s Stock Fall Despite Strong Q1?

Caterpillar (NYSE:CAT), the machinery giant, released its Q1 2019 results on April 24, followed by a conference call with analysts. The company beat market expectations for revenue as well as earnings. However, the company’s stock has fallen nearly 4% since the results, as management indicated that Caterpillar may lose market share (construction) in China amid competitive pricing pressure. For the first quarter, Asia Pacific construction sales fell 4% to $1.56 billion, from $1.63 billion a year ago, though overall sales in the Asia Pacific region grew 9% year over year to $3.2 billion.

We have summarized our key expectations for the company’s full year in our interactive dashboard – How Did Caterpillar Fare in Q1 And What Is the Outlook for Full Year? In addition, here is more Trefis Industrial Data.

How Did Caterpillar Fare In Q1?

• Caterpillar recorded revenues of $13.5 billion, compared with $12.9 billion in the first quarter of 2018, a 5% increase.
• Higher revenue was mainly due to higher sales volumes, driven by improved demand for both equipment and services. The most significant increase was in Resource Industries, partially offset by unfavorable currency impacts due to a stronger dollar.
• The company reported its highest ever first quarter EPS of $3.25, a 19% increase compared with the previous first-quarter profit per share of $2.74. However, Q1 2019 EPS included a discrete tax benefit related to U.S. tax reform of $178 million ($0.31 per share).

What To Expect From Construction Segment In 2019

• Construction revenues grew by 3% to $5.9 billion in Q1 2019, driven by strong demand in North America, which in turn grew by 13% year-over-year to $3.0 billion.
• The increase was mostly due to higher end-user demand for construction equipment, mainly road construction, and favorable price realization slightly offset by a smaller increase in dealer inventories as compared to Q1’18 and unfavorable currency impacts due to a stronger dollar.
• The segment’s operating profit declined by 3% (y-o-y) to $1.08 billion as a result of higher manufacturing costs related to higher material, labor and freight costs.
• We forecast the segment revenues to grow by 3% to $23.8 billion in 2019 mainly due to strong demand in North America partially offset by subdued demand in China. Moreover, a strong U.S. economy and strength in pipelines and local infrastructure development are likely to boost machinery demand in North America, slightly offset by weakness in residential construction.

What To Expect From Resource Segment In 2019

• The Resource segment reported revenues of $2.8 billion, an increase of 19% versus first the quarter of 2018, mainly due to higher equipment demand, favorable price utilization and increased services. Moreover, solid demand from mining and heavy construction equipment, including quarry and aggregate contributed to higher sales volumes.
• We forecast the segment revenues to grow in mid-single-digits in the near term. Strong commodity market fundamentals, higher demand levels for non-residential construction activities and increased demand for heavy construction, quarry and aggregate equipment will aid the segment’s growth in fiscal 2019.

How Much Can Energy and Transportation Segment Grow?

• Energy & Transportation sales in the first quarter were $5.2 billion comparable to the same quarter last year, while operating profit was $836 million, down 4%. Sales into oil and gas applications decreased by 7% while sales in power generation rose by 7%, due to higher demand for large diesel reciprocating engine applications.
• We forecast segment revenues to grow in low single-digits in the near term, driven by strong demand for power generation and gas compression equipment and improved demand for rail services, slightly offset by volatility in oil prices and take away constraints in the Permian Basin in the first half of the year.

What’s The Outlook For Fiscal 2019?

• For the full year, we expect the company’s revenues to grow by 4% to $56.8 billion, primarily driven by higher sales volume across operating segments and favorable price realization.
• Caterpillar revised its profit per share outlook to a range of $12.06 to $13.06, compared with the previous outlook range of $11.75 to $12.75, due to the first-quarter discrete tax benefit of $0.31 per share.
• We expect Caterpillar’s adjusted EPS for full-year 2019 to be just over $12. Using this figure with our estimated forward P/E ratio of 12.7x, this works out to a price estimate of $153 for Caterpillar’s shares, which is around 10% ahead of the current market price.

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