Caterpillar’s Beaten-Down Stock Has More Downside -- ICYMI

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The U.S. market has rebounded somewhat in the past week and a half, but if Caterpillar’s  (CAT) - Get Report outlook is any indication for industrials and some other sectors, stocks have a long way down to go.

The S&P 500 is down 23% from its all-time-high and 19% in 2020 to date. Caterpillar is down 18% from its 2020 high and down 24% this year to date.

“Following guidance withdrawals and production shutdowns from 75% of our coverage, we now assume four weeks of full disruption in our models and cut our fiscal year 2020 and 2021 EPS estimates,” wrote Morgan Stanley analyst Courtney Yakavonis in a note.

The analyst sees “10% to 15% downside for construction and truck versus 2019.” These estimate declines include sharp cuts for economic bellwether Caterpillar.

Caterpillar is already looking at a 29% decline in EPS in 2020 over 2019, analyst estimates say, as the coronavirus has disrupted supply chains originating in China, Europe and North America.

That’s on a currently expected revenue decline of 13%. Operating margins are shrinking across sectors, as companies pay fixed costs while revenues fall.

China is getting better, as the virus in the region is almost finished spreading. The country’s purchasing managers index rose in March from a year earlier, with a reading of 52.

Negatively, capital-expenditure cuts in the oil sector owing to falling oil demand caused a wave of estimate cuts for Caterpillar in early March.

And the nature of this outbreak —spreading like wildfire, rendering some of Wall Street’s profit models useless — poses an ongoing threat to any company.

In a March 26 news release the company said, "The continued spread of the Covid-19 pandemic is starting to impact Caterpillar’s supply chain.

“Due to uncertain economic conditions resulting in weaker demand, potential supply constraints and the spread of the Covid-19 pandemic and related government actions, Caterpillar is temporarily suspending operations at certain facilities.”

Yakavonis has lowered her 2020 EPS estimate for Caterpillar to $6.90 from $9.07, with the new estimate reflecting a 37% contraction year-over-year and below the consensus view of $7.82.

She lowered her 2021 forecast to $8.22 from $9.47, signifying that 2021 may present a recovery opportunity for investors to cash in on beforehand, but that the recovery may be slower than previously anticipated. For now, more downside is in the cards.

Caterpillar currently trades at roughly 14.5 times 2020 EPS, with the share price at $115. That’s below its five-year trailing average, but the multiple has fallen to as low as 8.8 times in that time span.

By Morgan Stanley’s numbers — against the rest of Wall Street’s — Caterpillar could fall 11% from here. And that’s assuming the same multiple on earnings.

On the optimistic side, the company has far less net debt — $2.5 billion — than expected earnings before interest, tax and non-cash expenses.

It has access to billions of dollars in credit lines from lenders and doesn’t have much debt due for several years, according to FactSet.

The company has not said that it will cut capital expenditures, although such a move would support free cash flow.

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