Caterpillar - Stocks Fall Monday
Stocks finally took a breather on Monday as they fell modestly. S&P 500 fell 0.78%, the Nasdaq fell 1.11%, and the Russell 2000 fell 0.63%.
Equities were on a 5 week winning streak heading into Monday as the S&P 500 was up 6.3% year to date. Stocks still need to fall further to rectify the difference between returns this year and the collapse in 2019 earnings estimates.
VIX increased 8.32% which pushed the CNN fear and greed index down 4 points to 54 which is neutral. Two sectors that were positive were consumer staples and real estate as they were up 0.46% and 0.96%. The two worst sectors were technology and communication services which fell 1.4% and 1.15%.
Nvidia’s weak guidance further spells bad news for the tech sector. The industrial stocks fell 1% because of Caterpillar’s bad earnings.
Caterpillar - Weak Earnings
This is the most important week of the year because of the large number of earnings reports and the Fed meeting. Monday was a taste of what is to come, and the results weren’t pretty.
Caterpillar’s weak results support the thesis that global economic growth is slowing. This was the first time Caterpillar missed EPS and revenue estimates and lowered its guidance since Q3 2013.
As you can see from the chart below, machine sales growth decelerated in all regions but Latin America. Asia Pacific led sales growth out of the 2016 morass. Now it is leading growth lower as it was only 3%.
Specifically, Caterpillar reported EPS of $2.55 per share which missed estimates for $2.99. Revenues were $14.34 billion versus $14.33 billion expected according to Refinitiv. Caterpillar must have missed the revenue estimates when averaged by a different firm.
The average estimate depends on which analysts are included. Each firm has different calculation methods. Caterpillar expects 2019 profits to be between $11.75 to $12.75. The mid-point of that projection is much lower than analysts’ projection for $12.73 in EPS.
China is 5% to 10% of Caterpillar’s sales. Since China represents over 30% of global economic growth, it matters more to the global economy than Caterpillar. This weak report is a sign the economy is weakening.
As you can see from the chart below, Caterpillar’s 9 month log percentage change is correlated with U.S. GDP growth. That’s no surprise because Caterpillar is highly cyclical.
Caterpillar - Weak guidance sent Caterpillar stock down 9.13%.
Caterpillar is usually a buy before the cycle troughs. However, sales growth is still positive, which means we aren’t close to the cycle trough.
Caterpillar stock might not rebound until 2020, depending on how deep this downturn is. North America is still doing well. It might end up outperforming in this cycle.
We will know more when the U.S. economic data that was delayed because of the shutdown comes out. North American construction sales were up 17%. China is expected to be flat in 2019.
The firm stated it had $40 million in extra material costs because of the tariffs. Those will be raised if China and America can’t make a deal in 4 weeks or if the deadline is extended.
Caterpillar - Big Tech Firms Lowered Capex Last Quarter
Tech investors should be nervous because international economies are weak. The tech sector has the largest foreign exposure. Intel and Western Digital told cloud investors to be nervous last week.
Nvidia brought bad news this week. If the big internet names, which include Microsoft, Amazon, Alphabet, and Facebook, report weak results and guidance, the stock market gains in 2019 can easily go up in smoke.
As you can see from the chart below, in Q3 Facebook, Alphabet, and Amazon all pulled back on capex. Q4 may not have been great for them.
Caterpillar - Nvidia Offers Weak Guidance
Last quarter definitely wasn’t good for Nvidia as the firm lowered guidance which sent its stock down 13.82% on Monday. Nvidia will report earnings on February 14th.
It expects revenues to be $2.2 billion instead of $2.7 billion. That’s a swing of 18.5%. Margins will also be hurt by “current market conditions.”
The firm blamed the guidance decline on “deteriorating macroeconomic conditions, particularly in China.” Furthermore, the CEO stated, “Q4 was an extraordinary, unusually turbulent, and disappointing quarter.”
Other tech stocks will see the same weakness in China that Apple and Nvidia are seeing. To be clear, Facebook and Alphabet don’t do business in China.
Caterpillar - Q4 Earnings Season Likely A Dud
I focus on the biggest earnings reports in articles. So far, they have been a mixed bag, but the major big cap internet names haven’t reported yet.
However, we already know Q4 earnings season will likely be a dud because 2019 estimates keep coming down. Specifically, 115 S&P 500 firms have reported earnings. 70% have beaten EPS estimates on 17.8% growth. Only 56% have beaten sales estimates on only 6.1% growth.
As you can see from the chart below, 2019 estimates expect low single digit earnings growth. There is still about 2 months left for Q1 2019 estimates to fall. Growth is only expected to be 3.42% which is down huge from Q4’s growth rate.
Interestingly, if Q1 growth ends up at that level the 2 year growth stack will improve from Q4 because Q1 2018 was so much stronger than Q4 2018. Specifically, the Q4 stack is 27.72%, while the Q1 stack is 29.35%.
Because the comparisons are tough, maybe it’s not fair to say the estimates are beatable. On the other hand, if 2019 earnings growth is 3%, it wouldn’t be a disaster for stocks.
To be clear, I am taking more of a negative stance now because stocks are up a lot this year. If stocks were at the Christmas Eve low, I would be talking about how low single digit earnings growth doesn’t support a bear market.
Caterpillar - Conclusion
The most important week of the year got off to an ominous start as Caterpillar missed estimates and lowered guidance and Nvidia lowered guidance.
Analysts have little room to cut before they start expecting negative earnings growth in 2
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