Caterpillar CAT can be viewed as a bellwether for the global economy, with the construction and mining equipment giant’s sales often growing during times of broad economic prosperity. Therefore, Wall Street will be closely monitoring its upcoming Q1 fiscal 2020 earnings results, which are due out on Tuesday, April 28, for more clarity on the coronavirus economy.
CAT & the Coronavirus
Caterpillar faced tough times during the U.S.-China trade war. The company’s sales fell roughly 8% in Q4 and around 2% in fiscal 2019. And now things look set to get much worse. The reason that CAT is likely in trouble is relatively straight forward: companies are unlikely to commit to spending, especially on big purchases, amid the global economic uncertainty brought on by the coronavirus pandemic.
For instance, a Bank of America BAC analyst recently downgraded CAT stock from “neutral” to “underperform.” The analyst pointed to a huge downturn in spending from the energy and mining industries, which are two key markets for Caterpillar. Last quarter, ‘Energy & Transportation’ accounted for roughly 45% of CAT’s sales. Plus, our overall near-term outlook for those industries looks brutal.
Our current Zacks estimates call for Energy industry companies in the S&P 500 to see their Q1 earnings fall 55%, with Transportation projected to tumble over 61%. Things look even worse in the second quarter, with Energy earnings expected to plummet 115% and Transportation projected to fall 111% (also read: Making Sense of the Earnings Picture During the Coronavirus).
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Caterpillar in a March 26 statement announced that it was “withdrawing its financial outlook for 2020” amid the unprecedented halt to the global economy. “At this time, Caterpillar is continuing to run the majority of its U.S. domestic operations and plans to continue operations in other parts of the world, as permitted by local authorities,” the company wrote in a statement.
“However, due to uncertain economic conditions resulting in weaker demand, potential supply constraints and the spread of the COVID-19 pandemic and related government actions, Caterpillar is temporarily suspending operations at certain facilities. The company will continue to monitor the situation and may suspend operations at additional facilities as the situation warrants.”
Q1 Outlook & Beyond
Looking ahead, our Zacks estimates call for CAT’s adjusted Q1 earnings to fall -40% to $1.77 a share, on the back of 17.3% lower sales. Peeking further ahead to the second quarter, which will account for much more of the stay-at-home push, Caterpillar’s revenue is projected to sink 30.6%. And the company’s adjusted Q2 EPS figure is expected to plummet over 61%.
Overall, CAT’s fiscal 2020 revenue is projected to fall 20%, with its earnings expected to tank 41.3%. The nearby graphic also shows how quickly the company’s earnings outlook has deteriorated.
Bottom Line
Caterpillar’s negative earnings revision activity helps it hold a Zacks Rank #4 (Sell) at the moment, alongside its “F” grade for Momentum in our Style Scores system. Shares of CAT have fallen roughly 25% in 2020, including an 11% decline since April 8.
Therefore, investors might want to stay away from CAT stock, as things could get worse before they get better. This becomes even more prudent when we consider that the broader earnings outlook has continued to fall over the last month.
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