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Caterpillar Digging a Difficult Earnings Hole – CAT

An earnings miss and guidance on the low end


Caterpillar Inc. (NYSE:CAT)Welcome to the Stock of the Day.

With the construction market heating up, let’s take a closer look at machinery titan Caterpillar (CAT), which just reported third-quarter results this morning. With shares down nearly 6% this morning, is now a good time to pick up shares of this dividend stock on the cheap? Or is today’s trading action a red flag for what’s to come? Find out today.

Company Profile

If you’re not familiar with the company, Caterpillar is the world’s largest manufacturer of earth-moving equipment. With a workforce of over 122,000, Caterpillar brings in nearly $66 billion in annual sales. CAT products range from industrial gas turbines to mini excavators. So if you need heavy equipment to mine, build or do just about anything, you need Caterpillar. Yield seekers will be interested to know that the stock currently yields 2.7%, but as I’ll discuss shortly, a healthy dividend isn’t everything.

Earnings Rundown

On Wednesday Caterpillar announced that third-quarter sales declined across all segments and regions. Ouch! Apparently what weighed on the company’s top line were reductions in dealer machine inventories. So sales fell 18% year-over-year to $13.42 billion, missing the $14.37 billion consensus estimate.

Meanwhile, profit nearly halved to $946 million, or $1.45 per share. Even with the company’s ongoing billion-dollar stock buyback program, it missed the $1.67 per share consensus earnings estimate by a wide mile. But what really caused shares to gap down this morning was the company’s poor outlook for 2014. The company expects next year’s sales to be flat with 2013 in a plus or minus 5% range.

Competition Breakdown

At first glance, Caterpillar appears to outperform the competition on several fronts. It has the fourth highest market cap in the business (out of 52 companies). In ranks third in long-term growth rate and sixth in return on equity. The company’s sales and earnings growth are middle-of-the-road.

But when you stack up Caterpillar against its main rival—Deere (DE)—you can clearly see that when it comes to fundamental health, “Nothing Runs Like a Deere.” Deere manages to score higher on each of the eight fundamental metrics I graded both stocks on, including sales and earnings growth and its track record of beating analyst estimates. However, both stocks are currently D-rated due to anemic institutional buying pressure.

If you’re really looking for a construction company to add, you’ll need to venture into small- and mid-cap territory with picks like A-rated Lincoln Electric Holdings (LECO) or B-rated Gencor Industries (GENC).

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past nine months, CAT has gapped down nearly 15% following one disappointing earnings report after another. So through the months, buying pressure has tapered off to the point where the stock now receives an F for its Quantitative Grade. This does not bode well for this Conservative stock, as institutional buying pressure is a key indicators of a stock’s profit potential.

And its easy to see why institutional investors have shied away from this company. Caterpillar receives failing marks on six of the eight fundamental metrics I graded it on, including sales and earnings growth as well as earnings surprises. Meanwhile, the company does have decent operating return on equity, but that’s not enough to warrant a buy or even a hold recommendation from me. CAT receives a D for its Fundamental Grade.

Bottom Line

Recommendation: D-rated Sell





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