Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why Caterpillar's Quarterly Miss Isn't as Bad as It Looks

By Motley Fool Staff - Updated Apr 25, 2019 at 12:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Yes, lower demand in China cut into revenue.

Check out the latest Caterpillar earnings call transcript.

Investors and the financial world view certain companies as bellwethers -- rapid gauges on the general health of the global economy. Heavy equipment titan Caterpillar ( CAT 0.59% ) is one of those, and with good reason. It's directly exposed to huge swathes of the construction, resource extraction, manufacturing, and agriculture industries. So naturally, its recent underperformance generated concerns -- even though revenue and profits did rise.

In this segment from MarketFoolery, host Chris Hill and analyst Emily Flippen talk about what the numbers suggest about the state of the Chinese slowdown, Caterpillar's strengths elsewhere, its investment thesis, and more.

A full transcript follows the video.

This video was recorded on Jan. 28, 2019.

Chris Hill: Sticking in China, Caterpillar's fourth-quarter profits came in lower than expected due to lower sales in the Asia-Pacific region because of lower demand in China. The phrase "bellwether stock" gets thrown around here and there. I sort of feel like bellwether stocks are not applicable across the board when it comes to investing. I feel like they're situational. And in the case of the category of global trade, I feel like Caterpillar is absolutely a bellwether stock, and this has to be a little concerning.

Emily Flippen: Yeah, that's true. I tend to be a little bit more lenient on Caterpillar than I do on NVIDIA for exactly that reason. When you have a stock that's so correlated to global growth, like a bellwether stock is, it takes a lot of economic slowdown to see the results that we're seeing with Caterpillar. I'll classify this again by saying, yes, there's an economic slowdown in China, but their revenues are still up 11% from where they were last year. It's not like we're looking at a global economic slowdown that's going to cast the end for all of these manufacturing companies.

Caterpillar, while it is a proxy in a sense, still gets more than half of its revenue from U.S.-based operations. It's important to look at China and see the economic slowdown there and see the impact it's going to have, but also, caveat that a little bit with the natural tendencies and changes that we see both domestically and globally.

Hill: I'm glad you pointed that out. Once I started to dig into the numbers a little bit with Caterpillar... I went in thinking, "God, how big was this miss? How bad was the profit?" But, no. Revenue was up year over year, profits were up year over year.

This is one of those stocks that appears to be pretty cheap on a valuation basis right now, but I can't say I'm itching to go out and pick up some shares. Even though shares of Caterpillar are 10% cheaper today than they were last week, I'm not itching to throw some money at this.

Flippen: Yeah, as a growth investor, I can't say that I spend a lot of my time thinking about the perfect price point to get in on a lower-growth company. I agree that they're cheap now in comparison to how they've been in the past, but we're also arguably at the later end of an economic cycle. Maybe that's just what we expect when we look at companies like this.

I will say that I think the drop that we're seeing in the market today is largely dependent on China, China, China. There's a lot of noise around China right now. We see that lower demand in the Asia-Pacific region and it really freaks some people out.

Hill: It does. The old cliche that the market hates a vacuum is absolutely true. This is one of those situations where part of what we're seeing with the drop in the market is the fact that there's not a lot of news on Wall Street today, and what news there is we've just talked about: NVIDIA and Caterpillar. These are the two dominant stock stories of the day, neither of them is good. So, maybe we're seeing an over-weighting placed on them, in terms of the market drop. Later in the week, we've got Microsoft, Apple, Amazon, along with a host of other companies reporting. Hopefully we'll see better news tomorrow.

Flippen: Yeah, and, this is the front end of going into peak earnings season right now. The earnings that we've seen up to this point have largely been great, a majority of them beating analysts' expectations. So, these being the first two of the week, I definitely think that there's a little bit of investor psychology that's playing against them.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$198.96 (0.59%) $1.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.