- Despite markedly lower inventory levels among CAT dealers, the company’s inventories are still high.
- Moving ahead, the demand for the company’s products is mixed.
- I provide metrics relating current and historic share valuation to revenues and profits.
There is much about Caterpillar (CAT) to attract investors. Caterpillar is a Dividend Aristocrat with 27 consecutive years of dividend increases to its credit.
The company is the largest construction and mining equipment manufacturer in the world. Now that more than half of the sales originate outside of North America, the firm can boast of a global footprint. With over 2 million pieces of equipment in operation and over a million of those operating with telematics, the firm has a client base that provides considerable recurring revenue.
Nonetheless, the company is a cyclical stock, and the pandemic creates headwinds that buffet the shares. Demand in mining and construction is depressed due to COVID, and related industries cut capex accordingly. The third-party dealers selling and servicing CAT’s wares responded by slashing inventories. That trend is likely to continue, at least over the short term.
Meanwhile, CAT’s revenues and profits have plummeted while the company’s own inventory levels remain high.
Recent Results
There isn’t much in last quarter’s results that bode well for investors. Revenue dropped 23% YoY, while EPS fell 54%. If there was “good” news, it was that those stats were an improvement over the previous quarter’s 31% revenue decline and 70% plummet in profits.
The order backlog decreased by $1.2 billion YoY, mirroring a similar decline in Q2. Operating profit margin declined by 5.8%. The chart below offers a snippet to compare Q319 to Q320.
Some Telling Metrics
During the Q3 Earnings Call, CEO Jim Umpleby stated CAT’s dealers decreased inventory by $600 million in the quarter. This followed a $400 million drop in dealer inventories in Q2, and a total reduction in inventories of $1.8 billion year to date. Umpleby went on to forecast that dealer inventories will plummet to the tune of $2.5 billion throughout 2020.
While those numbers are of concern, the company’s CFO added that Caterpillar’s total inventories are greater than the norm.
