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Oct. 22, 2019, 8:01 a.m. EDT

Caterpillar earnings: Expect weakness on China tensions and global economic slowdown

Stock hit by a Morgan Stanley downgrade on Friday as core business faces growing headwinds

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By Ciara Linnane, MarketWatch

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Revenue: FactSet analysts are expecting revenue to come to $13.405 billion, down from $13.512 billion a year ago. Estimize is expecting revenue of $13.436 billion.

Stock price movement: Caterpillar shares have fallen 2.7% in the last three months, but are still up 3.3% on the year. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.17% , which counts Caterpillar as a member, have fallen 1% in the last three months, but is up 16% on the year. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.04%   has edged down 0.1% in the three-month period and is up 19% on the year.

Analysts on FactSet have an average overweight rating on the stock, although of the 21 estimates that are public, there are 13 hold ratings and one sell. The average stock price target is $139.78, just above the stock’s current price of $131.

Analyst comments: Morgan Stanley’s Yakavonis is expecting the U.S. construction equipment market will peak in 2019 and the energy and transportation markets will fail to re-accelerate in 2020.

“Our [North America] construction equipment replacement cycle analysis suggests that replacement will revert to a headwind in 2020 while elevated dealer inventory levels have also materially increased the risk of a dealer inventory de-stock,” Yakavonis wrote in a note to clients. “We are also concerned about pricing heading into 2020, and think that margins could still be under pressure next year even if input costs fall.”

Yakavonis is expecting a “mild earnings recession” for Caterpillar in 2020 and trimmed her sales and EPS estimates to 4% and 2% below consensus. The analyst is expecting energy and transportation to be hit by recent downward revisions of oil and gas capex forecasts. Morgan Stanley’s oil services team recently updated those forecasts and are now expecting North American upstream spending to fall 7% in 2020.

See now: Kraton’s stock craters as the global economic slowdown prompts profit warning

BMO analysts are also expecting the second half to continue to disappoint.

“Most companies are expecting profoundly lower demand in the back half of calendar 2019, followed by a recovery as we enter 2020,” they wrote in recent commentary. “However, we expect short-cycle businesses to continue to pull back, and as these negative trends look set to feed into later-cycle areas, capital-expenditure-related companies (e.g., Caterpillar and Terex) will likely feel the effects. And possibly more inventory destocking across a number of areas could further exacerbate already declining volume.”

In September, Citigroup forecast softer demand for Caterpillar products and lowered its 2020 earnings forecasts. Analyst Timothy Thiem said he came away from a meeting with Caterpillar dealers more cautious on the stock, as MarketWatch sister publication Barron’s reported.

“Softer domestic upstream energy spend and a stronger [U.S. dollar] result in a reduction to our out-year top [and] bottom line estimates, putting us closer to current buy-side expectations.”

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,966.45
-48.61 -0.17%
Volume: 52.76M
Dec. 9, 2019 11:18a
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/zigman2/quotes/210599714/realtime
US : S&P US
3,144.72
-1.19 -0.04%
Volume: 411.55M
Dec. 9, 2019 11:18a
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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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