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Caterpillar Inc CAT

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Cautious Dealers Pare Inventories, but No Major Surprises in Caterpillar’s 2Q; Maintaining FVE

Scott Pope, CFA Equity Analyst

Analyst Note

| Scott Pope, CFA |

As the pandemic impeded commerce across the globe and spooked dealers, Caterpillar’s revenue declined 31% in the second quarter to $10 billion. Caterpillar’s independent dealer base reduced inventories by $1.4 billion in the quarter compared with a $500 million increase in the second quarter of 2019. This $1.9 billion change was a major factor in the $4.4 billion year-over-year sales decline. Caterpillar’s retail sales decline was a less severe 23% with Asia-Pacific the sole geography that grew at the retail level (+7%). Despite significant rationalization of its manufacturing footprint in the past decade, Caterpillar has significant fixed costs. We were modestly impressed that operating margin was 7.8% in the quarter, which was a major improvement over the 1.9% it experienced in 2009 during the financial crisis. Adjusted EPS plummeted to $1.03 from $2.83 in second-quarter 2019. Our fair value estimate of $148 remains unchanged.

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Company Profile

Business Description

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with approximately 13% of global market share in 2018. The company is divided into four reportable segments: construction industries, resource industries, energy & transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with 2,163 branches maintained by 168 dealers. Caterpillar Financial Services provides financing to its customers and dealers, generating approximately 9% of operating profit.

510 Lake Cook Road, Suite 100
Deerfield, IL, 60015
T +1 224 551-4000
Sector Industrials
Industry Farm & Heavy Construction Machinery
Most Recent Earnings Jun 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type High Yield
Employees 102,300