Please click the link to access our daily, Technical Market Recap with Wayne Nelson.  Within the recap Wayne discusses the declines in both Nvida and Catepillar shares that proceeded there quarterly warning and releases.  Wayne also discusses the overall market and earnings results that are and will continue to create market moves. The video is 31 minutes in duration.

According to Barron’s, Caterpillar’s results weren’t all that bad. Its sales grew 20% in 2018, while gross profit grew 24% to $17 billion, just below the $18 billion record profit recorded in 2012. Order backlog grew from $15.8 billion to $16.5 billion. And management expects sales and earnings to grow again this year, albeit at more modest rates thanks to the continuing recovery in mining and construction. Its shares have dropped 8.9% to $124.74 at 3:04 p.m., while theIndustrial Select Sector SPDR ETF (XLI) has fallen 1% to $69.34.

Cat’s Chinese sales dropped in the fourth quarter. But abnormal seasonality was blamed. That means the fourth quarter of 2017 was unusually strong, but don’t expect a bounce in 2019—Cat only expects Chinese markets to be flat in 2019.

The bad news didn’t stop there. Caterpillar’s finance division reported lower earnings year-over-year. That set off alarm bells for analysts. If Caterpillar’s leasing customers aren’t paying, then Cat’s business may be worse than feared. Management dismissed questions about reduced earnings and blamed the weakness on mark to market accounting losses and Marine loans made some time ago.

And the confusion didn’t stop there. Caterpillar also included restructuring charges this year in its 2019 guidance. In 2018, management excluded $400 million of restructuring expenses. CFO Andrew Bonfield, pointed out that restructuring expenses will be smaller in 2019. However, even if charges are less than the $400 recorded in 2018 the impact is still up to 40 cents in earnings per share. Adding that amount back to management’s $12.25 guidance would make it much closer to the $12.73 that Wall Street predicts. Better guidance could have soothed investors frayed nerves.

Add it all up, and that there were just too many questions for Caterpillar investors Monday.

It would be easy to look at Caterpillar’s guidance as a harbinger of tough times, but investors shouldn’t write off the industrial sector. Industrial companies in the S&P 500 trade at 14 times 2019 estimated earnings on average, a 14% discount to their historical average and a 6% discount to the overall market. That means that clean reports (and help from trade negotiations) should help the sector recover some of the ground it lost to the market last year, when industrial stocks dropped 15%, more than double the S&P 500’s 7%.

Later this week, 3M (MMM), Siemens (SIE. Germany), General Electric (GE),Boeing (BA), Illinois Tool Works (ITW) and other industrial will report quarterly results.

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2 Comments
  1. Ethan 7 months ago

    Excellent presentation and analysis Mr. Nelson! much appreciated!

  2. Wayne Nelson 7 months ago

    Hi Ethan,

    Thank you very much. And, you’re very welcome!

    I appreciate the feedback.

    I’m glad to know you found value in the content.

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