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Category: Stock Market and Caterpillar
Date: 9 October 2019 Stock Price: $117.97 We take a look at the 2nd quarter earnings report of their 2019 fiscal year of Caterpillar one of the world's leading machinery and equipment manufacturers with quarterly revenues topping $14 billion in this quarter.
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About Caterpillar
For more than 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets. With 2018 sales and revenues of $54.722 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three primary segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment.
Overview of Caterpillar's latest earnings report
- Total Revenues: $14.432 billion (up from $14.011 billion for the same quarter of the previous year)
- Total Revenues increased by 3% over the last 12 months
- Operating costs: $12.219 billion (up from $11.844 billion for the same quarter of the previous year)
- Operating costs increased by 3.16% over the last 12 months
- Net income: $1.629 billion (down from $1.707 billion for the same quarter of the previous year)
- Diluted earnings per share: $2.83 (up from $2.82 for the same quarter of the previous year)
- PE ratio: 10.33
- Diluted weighted-average shares outstanding: 573.1 million (down from 604.2 million for the same quarter of the previous year)
- Cash and cash equivalents: $7.429 billion
- Cash and cash equivalents per share: $12.96
- Cash and cash equivalents makes up 11.1% of Caterpillar's market capital
- Cash and cash equivalents makes up 9.38% of Caterpillar's total assets
- Accounts receivable: $8.996 billion
- Accounts receivable makes up 11.36% of Caterpillar's total assets
- Inventories: $12 billion
- Inventories makes up 15.15% of Caterpillar's total assets
- Cash generated from operations (for 6 months): $3.709 billion
- Cash generated from operations per share (for 6 months): $6.47
- Stockholders equity of Caterpillar: $14.878 billion
- Stockholders equity per share: $25.96
- So Caterpillar' is trading at 4.5 times its stockholders equity which is outside the expected range of between 2 and 4 times that most firms tend to trade at.
Caterpillar's management commentary on the results and fiscal guidance
DEERFIELD, Ill. – Caterpillar Inc. (NYSE: CAT) today announced second-quarter 2019 sales and revenues of $14.4 billion, a 3% increase compared with $14.0 billion in the second quarter of 2018. Second-quarter 2019 profit per share was $2.83, compared with $2.82 profit per share in the second quarter of 2018. During the second quarter of 2019, Machinery, Energy & Transportation (ME&T) operating cash flow was $2.0 billion. The company repurchased $1.4 billion of Caterpillar common stock and paid dividends of $0.5 billion in the second quarter of 2019. The enterprise cash balance at the end of the second quarter of 2019 was $7.4 billion.
“Sales and revenues increased this quarter, including a record performance from Construction Industries, which reflected our strong competitive position globally,” said Caterpillar Chairman and CEO Jim Umpleby. “Our strong operating cash flow in the quarter allowed us to repurchase shares and pay dividends of about $1.9 billion. This is in line with our intention to return substantially all free cash flow to shareholders.”
2019 Outlook
The full-year profit per share outlook range is maintained at $12.06 to $13.06, which includes the first-quarter $0.31 per share discrete tax benefit. The company currently expects to be at the lower end of this outlook range. The company continues to expect modest sales growth in 2019, which assumes a recovery in Oil and Gas near the end of the year and dealers working through higher machine inventory levels. The company still expects price realization to offset manufacturing costs. With a higher amount of restructuring costs incurred in the second quarter of 2019, the company expects restructuring costs for the remainder of the year to be significantly lower. “We expect our profit per share in 2019 to be another record,” added Umpleby.
“We have the right strategy in place to deliver long-term profitable growth through our continued focus on strategic investments, including growing services and expanding offerings. We will also continue to focus on driving operational excellence including a flexible and competitive cost structure.” The outlook does not include a mark-to-market gain or loss for remeasurement of pension and other postemployment benefit plans, which will be excluded from adjusted profit per share in the fourth quarter of 2019 along with any other discrete items.
“Sales and revenues increased this quarter, including a record performance from Construction Industries, which reflected our strong competitive position globally,” said Caterpillar Chairman and CEO Jim Umpleby. “Our strong operating cash flow in the quarter allowed us to repurchase shares and pay dividends of about $1.9 billion. This is in line with our intention to return substantially all free cash flow to shareholders.”
2019 Outlook
The full-year profit per share outlook range is maintained at $12.06 to $13.06, which includes the first-quarter $0.31 per share discrete tax benefit. The company currently expects to be at the lower end of this outlook range. The company continues to expect modest sales growth in 2019, which assumes a recovery in Oil and Gas near the end of the year and dealers working through higher machine inventory levels. The company still expects price realization to offset manufacturing costs. With a higher amount of restructuring costs incurred in the second quarter of 2019, the company expects restructuring costs for the remainder of the year to be significantly lower. “We expect our profit per share in 2019 to be another record,” added Umpleby.
“We have the right strategy in place to deliver long-term profitable growth through our continued focus on strategic investments, including growing services and expanding offerings. We will also continue to focus on driving operational excellence including a flexible and competitive cost structure.” The outlook does not include a mark-to-market gain or loss for remeasurement of pension and other postemployment benefit plans, which will be excluded from adjusted profit per share in the fourth quarter of 2019 along with any other discrete items.
Caterpillar (NYSE: CAT) stock price history
The image below, obtained from Google, shows the stock price history of Caterpillar over the last 5 years. And it's been a pretty good time for Caterpillar stockholders. 5 years ago it was trading at $93.20 and its currently trading at around $117.97 a stock. That's a return of 26.57% provided to Caterpillar stockholders over the last 5 years. While the returns aren't bad the opportunity cost of holding Caterpillar that made just 26% over the last 5 years compared to holding Netflix for example that made over 300% the cost of holding Caterpillar is significant. The stock of Caterpillar is trading at a lot closer to its 52 week low of $111.75 than it is to its 52 week high of $153.66 which to us is a clear indication that the short term sentiment and momentum of Caterpillar's stock is negative at this point in time.
Recent coverage of Caterpillar
The extract below discusses the latest on Caterpillar as obtained from TheStreet.com
Caterpillar (CAT - Get Report) set a multi-year low of $111.75 on Aug. 28 and I consider this a double bottom vs. the Oct. 29, 2018 low of $112.06. Given this observation, my call is to buy the stock down to its "reversion to the mean" at $115.14 and its annual value level at $114.11. This bullish call is backed by positive fundamentals. The stock is cheap with a P/E ratio of 10.74 and generous dividend yield of 3.43%, according to Macrotrends. If you believe that discussions with China on tariffs later this week will be positive, this trade is for you.
I use the 200-week simple moving average on its weekly chart as the technical "reversion to the mean." The stock closed Friday, Oct. 4 at $121.04, down 4.7% year to date, and is up 8.3% from its Aug. 28 low of $111.75. The stock is consolidating a bear market decline of 30.1% from its all-time intraday high of $173.24 set on Jan. 26, 2018. The stock had a huge bull market rise going into 2018 on the hype of pending infrastructure spending, then hit the brakes on a slowdown in construction spending and the trade war with China. A positive to consider now is the turnaround in the housing market.
Read the full article here
Caterpillar (CAT - Get Report) set a multi-year low of $111.75 on Aug. 28 and I consider this a double bottom vs. the Oct. 29, 2018 low of $112.06. Given this observation, my call is to buy the stock down to its "reversion to the mean" at $115.14 and its annual value level at $114.11. This bullish call is backed by positive fundamentals. The stock is cheap with a P/E ratio of 10.74 and generous dividend yield of 3.43%, according to Macrotrends. If you believe that discussions with China on tariffs later this week will be positive, this trade is for you.
I use the 200-week simple moving average on its weekly chart as the technical "reversion to the mean." The stock closed Friday, Oct. 4 at $121.04, down 4.7% year to date, and is up 8.3% from its Aug. 28 low of $111.75. The stock is consolidating a bear market decline of 30.1% from its all-time intraday high of $173.24 set on Jan. 26, 2018. The stock had a huge bull market rise going into 2018 on the hype of pending infrastructure spending, then hit the brakes on a slowdown in construction spending and the trade war with China. A positive to consider now is the turnaround in the housing market.
Read the full article here
Caterpillar (NYSE: CAT) latest stock valuation
So what is Caterpillar's stock worth based on the release of their latest earnings report and the outlook provided for the rest of Caterpillar's 2019 fiscal year? Based on Caterpillar's latest earnings and their outlook provided our valuation model provides a target (full value) price at $144.90 a Caterpillar stock. We therefore believe that the stock is undervalued.
We usually suggest long term fundamental or value investors look to enter into a stock at least 10% below our target (full value) price which in this case is $144.90. Therefore we see a good entry point into Caterpillar stock at $130.40 or below. Since the stock of Caterpillar is currently trading at well below our recommended entry point into Caterpillar we rate Caterpillar stock as a buy
We usually suggest long term fundamental or value investors look to enter into a stock at least 10% below our target (full value) price which in this case is $144.90. Therefore we see a good entry point into Caterpillar stock at $130.40 or below. Since the stock of Caterpillar is currently trading at well below our recommended entry point into Caterpillar we rate Caterpillar stock as a buy