Caterpillar (NYSE:CAT) was expected to send the whole market down Jan. 28 after reporting disappointing earnings. The company, which recently moved its headquarters from Peoria to the Chicago suburb of Deerfield, Ill., reported earnings per share of $2.55 were well short of the expected $2.99 or the hoped-for “whisper number” of $3.03 per share. The company had warned on the fourth quarter back in October, but after an initial dip CAT stock headed higher, as it wasn’t as bad as the falling market feared.
Revenue for the quarter, however, came in at $14.34 billion, $10 million ahead of estimates, and CEO Jim Umpleby wrote that the company was expecting “modest” sales increases going forward.
Once the profit number was released, however, the shares fell 8% to about $125 per share, wiping out gains from the previous trading day and the Friday after-market. Caterpillar’s downdraft is weighing on the Dow Jones Industrial Average, which is off 1.3% as of this writing.
For all of 2018, Caterpillar earned an adjusted $11.22 per share on revenue of $54.7 billion, and finished the year with $7.9 billion in cash even after buying back $3.8 billion in stock. Its outlook for 2019 earnings was in the range of $11.75-12.75 per share.
Looking deeper into the numbers, fourth-quarter revenue from resource industries were up 21% from a year ago, while construction industry revenue rose just 8%. The best construction results by YoY percentage gains were reported in North America; the best resource industry results came from the Asia-Pacific region; the best energy results came from the EAME region. Most of the year-over-year profit increase came from higher sales, as rising costs just about offset higher prices. Caterpillar’s global workforce increased by 7,300 during the year, to 124,000.
Caterpillar is a “canary in the coal mine” not only for the U.S. economy but for the global industry. Its heavy machinery is sold under a variety of brand names, and it has operations around the world, including Asiatrak, which makes undercarriages in China, and Hindustan, which sells its equipment into the fast-growing Indian market.
CAT stock fell almost 20% during 2018, pummeled by rising trade tensions, weakness in the energy sector, and concerns for the Chinese economy. The October fall was highlighted by Caterpillar management warning about the impact of tariffs on the company. Investors at the time ignored the fact China represents just 10% of revenues, focusing on the knock-on effects of a trade war hitting industry generally.
The outlook was also downgraded early in January by Goldman Sachs, although Goldman retained a “buy” rating on the shares.
Despite the fall in CAT stock Monday, it’s still well ahead of its October low of $115 per share. The dividend of 86 cents per share yields over 2.5% and is supported by earnings three times over. It was at 60 cents per share five years ago, when the stock traded at just under $100 per share.
After paying dividends for its 25th straight quarter last year, Caterpillar regained its status as a “dividend aristocrat,” so it’s likely that income investors, and their investment advisors, will pile into the stock and slow its fall, seeking its safe yield.
The Bottom Line
Caterpillar’s status as a “dividend aristocrat” is a recent one. A real global recession would likely hit results very hard. The company is very sensitive to the economic winds, and the big 2018 didn’t quite match 2014, when the company had sales of $55.2 billion at the height of the oil boom.
That said, Caterpillar would enter any downturn in a very strong cash position, with solid earnings momentum for an income stock. Expect income investors to grab it before it falls too far.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.