Buy Caterpillar (CAT) Stock Before Q4 Earnings On Possible 2020 Comeback?
Zacks Investment Research | Jan 29, 2020 06:00AM ET
Caterpillar (NYSE:CAT) shares have been volatile over the last 12 months and are down 16% in the past two years amid the global economic slowdown and U.S.-China trade fight. The question for investors is will the construction and mining equipment giant’s upcoming Q4 financial results spark a run for CAT stock?
What’s Going on with CAT?
Caterpillar fell short of both top and bottom-line estimates in the third quarter and lowered its 2019 forecast. CAT’s Q3 revenue slipped 6% from the year-ago period and profit dipped 8%. The last time it posted a year over year sales decline was Q4 FY16. “In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” CEO Jim Umpleby said in prepared remarks.
Caterpillar made these projections in late October, months before the phase-one trade deal between the U.S. and China was officially signed. The S&P 500 has climbed 7% since CAT reported, on the back of low interest rates, the U.S.-China trade cease-fire, an expected return to earnings growth, and more.
Looking ahead, the International Monetary Fund expects worldwide GDP will climb 3.3% in 2020, which would come in higher than last year’s 2.9%. The IMF also projects global trade volumes to rebound, boosted by the trade agreement. More specifically, U.S. GDP is expected to grow 2% in 2020, down from 2.3% in 2019, while China is also expected to slip to 6%, from 6.1% last year.
More Fundamentals
Recent coronavirus-based worries have caused some market uncertainty, but they seem unlikely to really shake-up the long-term global economic picture.
On top of that, IHS Markit’s composite U.S. PMI came in at 53.1 in January. This marked a 10-month high and a jump from December’s 52.7. However, the manufacturing PMI dipped to 51.7 in January, from 52.4 in December. Any reading above 50 does represent growth in business activity, but it hardly marks a strong start to 2020 for Caterpillar.
As we can see in the nearby chart, CAT stock has still outpaced the S&P 500 over the last five years. However, the last two years have been rough on Caterpillar shares, which are down 16%. Meanwhile, fellow beat-down Dow component Boeing (NYSE:BA) has only slipped 7%, while United Technologies Corporation (NYSE:UTX) is up 12%.
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With that said, Caterpillar’s peer group, which includes Terex (NYSE:TEX) , H&E Equipment Services (NASDAQ:HEES) and others, has tumbled 41% over the past two years.
The downturn has certainly made CAT’s valuation appear more attractive. Caterpillar stock is trading at 12.7X forward 12-months Zacks earnings estimates, which marks a discount against its industry’s 17.7X average. More importantly, CAT stock has traded as high as 31.7X in the last three years, with a 13.4X median.
Caterpillar currently holds a “B” grade for Value in our Style Scores system, and its dividend yields 3.04% at the moment. This easily tops the 10-year U.S. Treasury’s 1.65%, as well as the Dow’s average of roughly 2.35%.
Q4 Outlook & Beyond
Our current Zacks estimates call for the company’s fourth quarter sales to slip 5.2% to hit $13.59 billion—which is better than Q3’s 6% decline.
Caterpillar’s fiscal 2019 revenue is projected to slip around 0.90%. Investors should note that this comes against hard to compared periods of impressive growth, with 2018’s sales up over 20% and 2017 up 18%.
Looking further ahead, Caterpillar’s Q1 fiscal 2020 sales are expected to fall 7.9%, with fiscal 2020’s revenues expected to come in 4.2% below our current-year projection. This might look bad, but it is hardly uncommon for Caterpillar since its sales are tied to broader spending cycles.
At the bottom end of the income statement, CAT’s adjusted Q4 earnings are projected to fall by 7.1% to $2.37 per share, with FY19’s EPS figure expected to dip 3.5%. Then Caterpillar’s adjusted fiscal 2020 earnings are then expected to slip 2.5% lower.
Bottom Line
Caterpillar holds a Zacks Rank #3 (Hold) at the moment based on its earnings estimate revision picture, which has remained mostly unchanged since coming down big right after its Q3 release. On top of that, CAT is part of an industry that rests in the top 28% of our more than 250 Zacks industries.
The Deerfield, Illinois-based company is set to report its Q4 earnings results before the opening bell on Friday, January 31. The company has missed bottom-line estimates in three out of the last four periods, and its outlook is hardly great.
However, investors should keep an eye on CAT and see how Wall Street reacts to the report because it could be set for a climb based on its dividend, valuation, and its position well off its highs.
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