Here's a brief and fun version of mine on Caterpillar's (CAT) earnings:
Caterpillar management: Quarter three didn't meet expectations. Unfortunately, we came up short.
The market: We don't care!
Management: And it looks like Q4 is going to be disappointing as well.
The market: We love you, Caterpillar!
Management: Seriously, folks, Q4 is really ugly. Between the macro concerns created by this U.S. -- China trade war, end-user demand being flat, retailers cutting inventory, and local competition, especially in China, it's bad out there.
The market: Buy more?!?
Management: Well, dealers cutting inventory will give us flexibility in 2020.
The market: They just set up a scenario to guide up in Q4 or maybe Q1 next year.
Management: That's, um, not exactly what we said, but--
Just how bad were the numbers? CAT reported earnings per share of $2.66 versus expectations of $2.88. Revenue of $12.8 billion came up well short of the $13.57 billion estimate. That isn't a rounding error. That's a miss.
Management added that it expected full-year EPS numbers to be in the $10.90 to $11.40 range against previous estimates of $11.70. Given this was quarter three, which was $0.22 short, and the guide lower is $0.30 to $0.80 for the full year, we can anticipate a fourth-quarter shortfall of $0.08 to $0.58.
I'll admit, I can see how there would be optimism around the dealer inventory statement. That hints that the worst is behind the company in the third and fourth quarters in terms of inventory. It should help increase margins, slightly as well as cash flow.
This does allow for guide-up potential should end-user demand increase or dealers anticipate an increase so they begin to stock again. It happened a year ago to the tune of $800 million. CAT beat on the top and bottom line in that quarter. It was also able to beat and raise in the quarter prior to that. Given the market is forward-looking, then there is a chance that's what the pre-market dip buyers are anticipating.
Our goal shouldn't be to tell the market it is wrong, but to do our best to understand why the market is buying or selling, especially when the action appears contrary to logic. A miss plus a guide lower usually warrants selling, but bears have struggled to break the stock below $131 and bulls are trying to put together a small rally as I type.
In terms of the technical view, a close over $131 this week puts CAT right at its resistance level. A close above $132.50 and we have a weak "W" breakout. I call it weak, because the pattern is one of lower highs and lower lows, which is not ideal. The stock will still face resistance in the $135 to $140 range as any of the previous failed breakout buyers will likely be more cautious and consider bailing.
I don't love the report. There appears to be bigger issues than macro-concerns in regards to inventory management as well as local competition. That being said, if CAT pushes into the green Wednesday and holds above $131.50 come this Friday, there's no way I want to be short.
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