The fact that Caterpillar (CAT 0.01%) will feel the pinch of the COVID-19 pandemic and the resulting lockdowns and halt in global manufacturing activity isn't news anymore. But the real question worrying investors is how big the impact could be.
The answer lies in Caterpillar's latest machinery sales numbers. There's a clear emerging trend: decelerating demand and sales for Caterpillar's machines. Wait, that's an understatement. I went back and checked Caterpillar's financials, and the company last reported anything close to such a big drop in early 2016. A bigger drop occurred only in early 2010. Yes, 2010.
Caterpillar just put out a really scary picture
Every month, Caterpillar releases data on its global retail machinery sales for the previous three-month rolling period. From an investor viewpoint, it's a great practice, as the numbers give an idea about two key things: (1) how the company is faring on an ongoing basis and (2) the economy's health, as Caterpillar is widely considered an economy bellwether for several key sectors, including mining, construction, energy, and transportation.
Image source: Getty Images.
For the three months ended April, Caterpillar's worldwide machinery retail sales tanked 22% compared to the year-ago period, with every business segment and geographic region reporting sharp declines in sales. The table below shows year-over-year declines.
| Segment | Asia-Pacific | EAME* | Latin America | North America | World |
|---|---|---|---|---|---|
| Resource Industries | (26%) | Flat | (44%) | (30%) | (24%) |
| Construction Industries | (14%) | (20%) | (18%) | (26%) | (21%) |
| Total | (17%) | (15%) | (28%) | (27%) | (22%) |
*EAME: Europe, Africa, Middle East region. Total sales are for all three segments, including energy & transportation. Data source: Caterpillar.
For its energy & transportation segment, Caterpillar broke down sales industry-wise, or by end-user market, for the three months ended April.
| Energy & Transportation End Industry | Retail sales |
|---|---|
| Power Gen | (5%) |
| Industrial | (26%) |
| Transportation | (26%) |
| Oil & Gas | (26%) |
| Total | (19%) |
Data source: Caterpillar.
It's evident that demand for Caterpillar's machinery has dried up globally as mining operations (part of its resource industries segment) have been suspended, construction and transportation activities have stalled, and the oil price rout has put the energy sector in a limbo like never before.
What lies ahead for Caterpillar
On April 28, Caterpillar reported a 21% drop in sales for its first quarter, with dealers adding to machine and engines inventories by a meager $100 million compared to $1.3 billion in Q1 2019.
Interestingly enough, nearly 75% of Caterpillar's key production facilities across all business segments were operational as of mid-April. Yet, there's no knowing when demand will recover given the unprecedented nature of the COVID-19 pandemic, which is why Caterpillar didn't provide any guidance for 2020 and is aggressively cutting costs.
The verdict is clear: Caterpillar and its shareholders should brace for some tough quarters ahead.
