The Street Reacts To Caterpillar's First Notable Miss In Years

Heavy construction and equipment maker Caterpillar Inc. CAT reported Monday with fourth-quarter results that fell short of expectations for the first time in around two years. Here's how the Street reacted.

The Analysts

• Morgan Stanley's Courtney Yakavonis maintains an Overweight rating on Caterpillar with a price target lowered from $164 to $160.
• Wells Fargo's Andrew Casey maintains at Outperform, unchanged $145 price target.
• Bank Of America's Ross Gilardi maintains at Buy, price target lowered from $163 to $152.
• Baird's Mircea (Mig) Dobre maintains at Outperform, price target lowered from $167 to $161.
• RBC Capital Market's Seth Weber maintains at Sector Perform, price target lowered from $142 to $140.
• Tigress Financial Partners' Ivan Feinseth.

Morgan Stanley: Takeaways From The Print

Yakavonis named seven takeaways from Caterpillar's earnings report in a Tuesday note: 

• Price/cost will be neutral in 2019 despite 1-4-percent pricing actions.
• Management's 2019 EPS guidance of $11.75 to $12.75 assumes "modest" volume growth and share repurchases.
• Dealer inventories in Q4 were aligned with market demand and within normal ranges.
• Part of the Q4 weakness is attributable to a $72-million unfavorable impact from an increase in the allowance rate at Cat Financial.
• The mining business saw continued momentum and will continue growing in 2019.
• Management remains "upbeat" on gas compression and energy prices are supportive of frac activity.
• China sales will be around flat in 2019 despite an improved competitive position.
• A capital allocation strategy is likely to be detailed at the investor day presentation in May.

Wells Fargo: Earnings Growth Through 2020

Caterpillar's 2019 guidance fell short of the Street's estimates, and many investors are likely discounting earnings as being at "peak potential," Casey said in a Monday note. Yet the company is likely to show earnings growth in 2019 and 2020, as management's guidance also suggests modest revenue growth and potential margin upside, he said.

The midpoint of management's guidance is likely conservative given a "decent" backlog growth and signs of early benefits from pricing increase, according to Wells Fargo. 

Related Link: Benzinga's Top Upgrades, Downgrades For December 26, 2018

Bank Of America: No Longer A 'Slam Dunk'

Exiting Caterpillar's earnings report and conference call, many investors were "unconvinced" in the manufacturer's 2019 guidance, Gilardi said in a Monday note. Caterpillar would have matched or beat the Street's 2019 estimates if not for a tax rate that was 200 basis points higher than expected, he said. The company's 2019 outlook looks "achievable" at current levels, although it is no longer a "slam dunk," the analyst said. 

Baird: 'Fresh Pick'

Caterpillar remains a "Fresh Pick" stock — a high-conviction investment idea — through at least March, as Monday's sell-off is a function of a "lack of visibility on management's guidance assumptions," Dobre said in a Monday note. As time passes and "more clarity emerges" surrounding replacement demand and trade wars, the sentiment can improve, and investors should take advantage of the "good value in the stock," the analyst said. 

RBC: Don't Buy The 'Inexpensive' Stock

Caterpillar investors have multiple "sources of angst" exiting the print, Weber said: 

• Weak margins in the construction segment despite higher revenue.
• Softening in some financial metrics.
• A year-over-year decline in the resource industries backlog.

On the positive front, the company is ramping its stock buyback program aggressively — but the multiple concerning readouts from the quarter and the potential for a slowdown in global growth implies investors shouldn't be buyers of the "relatively inexpensive" stock at today's levels, according to RBC. 

Tigress: Long-Term Opportunity Unchanged

Caterpillar stock continues to offer investors a compelling long-term opportunity, Feinseth said in his daily newsletter. The company could prove to be a major winner from a resolution of the Sino-American trade dispute and could see a ramp in demand, he said. Caterpillar is likely to also be a major beneficiary from a "much-needed" boost in infrastructure spending, Feinseth said. 

Caterpillar's stock could move higher from an additional $10-billion share buyback authorization on top of the existing $4.2-billion remaining from the 2014 plan, the analyst said. 

Price Action

Caterpillar shares were up 3.09 percent at $128.21 at the time of publication Tuesday. 

Related Link: Analysts Say The Market Is Getting Caterpillar Earnings Wrong