Do Caterpillar Earnings Signal a Value Opportunity or a Value Trap?

Caterpillar Inc. (NYSE: CAT) reported third-quarter 2020 results before markets opened Tuesday. The heavy equipment maker posted diluted earnings per share (EPS) of $1.22 on revenues of $9.9 billion. In the same period a year ago, the company reported adjusted EPS of $2.66 on revenues of $12.8 billion. Third-quarter results also compare to consensus estimates for EPS of $1.12 and $9.8 billion in revenues.

Operating cash flow totaled $4.3 billion in the quarter, down from $4.5 billion a year ago, and the company boosted its overall cash position to just over $1 billion during the quarter to close with $9.3 billion in cash, short-term investments and restricted cash.

Cat’s operating profit margin fell from 15.8% in the same quarter last year to 10% and sales fell by 23%. Sales in the company’s construction industries dipped by 23% to $1.2 billion, in the resource industries segment by 21% to $494 million, and by 24% in the energy and transportation segment by 24% to $1.3 billion.

Sales fell in all the company’s geographical segments as well. Overall, North American sales fell 31% in the machinery business, by 37% in Latin America, by 14% in Europe/Asia/Middle East and 8% in Asia/Pacific.

Chairperson and CEO Jim Umpleby commented: “Our third-quarter results largely aligned with our expectations, and we’re encouraged by positive signs in certain industries and geographies. We’re executing our strategy and are ready to respond quickly to changing market conditions.”

Caterpillar did not provide guidance, but the consensus estimates for the fourth quarter call for $1.45 in EPS and sales of $11.2 billion. For the full year, analysts are looking for EPS of $5.22 and sales of $41.6 billion.

Shares traded down about 2.3% in Tuesday’s premarket session at $159.55, after losing 3.2% on Monday. The stock’s 52-week range is $87.50 to $171.26, and the consensus 12-month price target is $150.18.

Cat pays a dividend yield of 2.52%, and shares trade at a multiple of more than 22 times expected 2021 earnings. With shares trading above the price target, investors have to decide if that means the stock is undervalued or a value trap. So far Tuesday, they’re choosing the latter.

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