Caterpillar (CAT) stock is slid sharply ahead of the kickoff of its earnings call, but it's not time to panic just yet, according to some investors and analysts.
Shares of the 94-year-old industrial giant dipped nearly 5% shortly after the open after missing the mark on earnings per share and incurring some tariff- and energy-related slowdowns in the quarter, giving an early morning jolt to portfolios and the Dow Jones industrial average.
"We are not pleased with this sharp bottom-line miss," Jim Cramer's Action Alerts Plus team said. "But there are some saving graces."
The team pointed to restructuring costs that will roll off throughout the year and currency pressures that could quickly shift as U.S. monetary policy pivots. The maintained guidance from the Deerfield, Illinois-based conglomerate, despite the big miss, was also encouraging on the possibility of a swift comeback in the second half.
"We continue to like the longer-term framework of management's strategy and believe CAT can produce better results in the second half of the year into 2020 as more favorable economic conditions develop due to lower rates, eased trade tensions, and perhaps even a recovery in the oil cycle as told by Halliburton (HAL) and Schlumberger (SLB) ," the team concluded. The stock deserves to be down a bit, but trading lower to $130 early this morning looks a bit oversold to us."
Analysts remained largely on side as well, with the FactSet consensus remaining a "Buy" despite the downside surprise and a consensus price target of nearly $150 per share, suggesting significant upside.
Key to the confidence is the belief that the quarter was not quite as bad as the market is suggesting.
"Strong cash generation and increased share repurchases are consistent with the message from the recent investor day for higher returns to shareholders," Jefferies analyst Stephen Volkmann said. "All in, we view the quarter as largely in line, but unlikely to attract significant new buyers."
At the very least, Volkmann did not anticipate such a sell-off.
While inventories remain high from the quarter, others noted that the company's ability to get ahead of some headwinds and track record of execution should also encourage normalization throughout the year.
"Pricing was robust," Barclays analyst Adam Seiden said, adding that "4% in construction, 5% in mining likely confirms that CAT has put through a series of price increases as of the beginning of the year. Our model in the call had assumed a step-down to low-single digits with higher inventories weighing on CAT's ability to get price in 2019; that assumption appears incorrect."
China, which is a key concern for pricing pressures, is also not as large a risk as headlines suggest. Only 5% of the company's revenue is generated in the region.
"We want to stick by it and buy it at $130, because then you've got [CEO Jim] Umpleby derisked," Jim Cramer concluded. "This is going to be their last not-so-great quarter."
As his team notes, "Caterpillar is very much a conference call stock," which means it will be imperative for investors to tune into the conference to either catch a quick rebound or avoid any more bearish forecasts offered by management.
CAT and SLB are holdings in Jim Cramer's Action Alerts PLUS member club.