Caterpillar Inc. (CAT) has dug a hole for its shares after reporting disappointing fourth-quarter results here on Monday morning.
Caterpillar's release revealed a big miss on earnings per share, which came in $0.43 below analyst estimates on revenue that merely was in line with expectations. The miss marked Caterpillar's first report to come in under the bar since 2016.
Caterpillar blamed slowing demand in China, unfavorable currency impacts and higher costs for freight, labor and materials for producing the disappointing result.
The tougher headwinds and big quarterly miss obscured positive full-year results, with 2018 sales that totaled $54.7 billion, up 20% from 2017, and profit of $10.26 per share compared with $1.26 per share in 2017.
Shares of the Peoria, Illinois-based manufacturing and machinery giant fell quickly and significantly after news of the result came across, taking some wind out of the stock's recent rally from a Christmas Eve bottom. The stock was down around 6% before Monday's opening bell.
Lightening the Load
A key for the stock digging out of its rut and returning to a rally is the tempering of expectations moving forward amid a more difficult macroeconomic environment.
"Our outlook assumes a modest sales increase based on the fundamentals of our diverse end markets as well as the macroeconomic and geopolitical environment. We will continue to focus on operational excellence, including cost discipline, while investing in expanded offerings and services to drive long-term profitable growth," CEO Jim Umpleby said.
Caterpillar's release said its nearly $8 billion in cash should allow the company to return capital to shareholders consistently throughout the year. The plan could prove highly beneficial, especially as shares trade at their lowest forward-looking price-to-earnings (P/E) levels since 2012, according to Zack's Investment Research.
Caterpillar said it expects 2019 EPS to increase to a range of $11.75 to $12.75, which is largely in line with expectations published by Deutsche Bank, but is at the low end of overall consensus expectations of $12.73.
Analysts noted that Monday's news could work in favor of opportunistic buyers.
"Heading into fourth-quarter results, we believe 2019 street numbers still need to come down and we expect a conservative guide to be the catalyst," Deutsche Bank analyst Chad Dillard wrote in anticipation of the release.
Dillard said the risk-reward profile moving forward makes the stock attractive as it takes a hit; he set a "Buy" rating and a $156 price target for the stock as it should start to align more with its peers' valuations.
Credit Suisse analyst Jamie Cook commented ahead of the release that fears for the future may be overdone and are largely reflected in the stock's paltry multiple already.
"We believe peak fears are overdone and reflected in the multiple and instead would look to moderating growth," she said. "Plus, we believe CAT will address capital allocation and provide updated financial targets, serving as a positive catalyst."
Cook highlighted surveys that show the demand for Caterpillar products remains relatively strong, aside from China, where the company has encountered slowing demand. That suggests the earnings news on Monday morning may shake out most of the bad news on the stock.
It will be incumbent upon CEO Umpleby and the executive team to convince the market that the worst is indeed over and the low watermark for Caterpillar has been reached.
An earnings call is scheduled for 11 a.m. ET and is available here.