Sievers biogas

Farmer Bryan Sievers checks the oil in his natural gas-powered Caterpillar generator. The generator works 24/7, so the oil has to be full at all times.

2018 was a frustrating year for Caterpillar’s investors.

In the first nine months of the year, Caterpillar reported three consecutive quarters of record profit per share. For the full year, its annual profit per share was the highest in the company’s 93-year history. Profit per share — a company’s profit divided by its number of outstanding shares of common stock — is a key metric in quantifying a company’s performance relative to the price of its stock.

Yet in 2018, Caterpillar’s stock declined by 19.4 percent, lagging the industrial sector benchmark, the XLI Industrial Sector Exchange Traded Fund, which lost 14.9 percent. Compared to the broader market, Caterpillar’s stock fared even worse, as the S&P 500 lost just 6.2 percent in 2018.

This year, investors were hoping for a reprieve from Caterpillar’s 2018 punishing decline. That opportunity presented itself on Wednesday morning when Caterpillar reported its January-March first quarter earnings. And despite the relative quality of those results, unfortunately, the celebration was short-lived.

For the first quarter, Caterpillar reported sales and revenues of $13.5 billion and profit per share of $3.25, both above the market’s expectations of $13.4 billion and $3.15, respectively. The $3.25 profit per share was the highest first quarter profit per share in company history. Caterpillar’s net operating profit (revenues minus expenses) of $2.207 billion was also 5 percent higher than the first quarter of 2018. Caterpillar cited higher sales volumes driven by improved demand for its goods and services.

Despite the seemingly strong first quarter performance, on Wednesday, Caterpillar’s stock fell more than 3 percent, losing $4.30 to close at $137.73. So why, yet again, did Caterpillar’s stock decline after reporting its quarterly earnings?

For 2019, Caterpillar projects just a modest increase in sales. It continues to face challenges in its construction industries operation, the largest of its three core segments. In the first quarter, year-over-year construction sales growth was just 3 percent, down from an already weak 8 percent growth rate it reported in the fourth quarter.

In North America, construction sales remain relatively strong, with annual growth of 13 percent. However, sales in its three overseas regions continue to struggle. Construction sales fell by 7 percent in Latin America and by 6 percent in Europe and the Middle East. More importantly, sales fell by 4 percent in the Asia Pacific region, which is dominated by China – the world’s second largest economy and America’s largest trading partner.

For Caterpillar, the Asia Pacific region accounts for almost 25 percent of its total sales and revenues. But China’s economy is in significant decline. In 2018, China reported its slowest pace of economic growth in 28 years. This year, its economic growth is expected to decline even further.

Apart from the weakening global economy, like many manufacturers, Caterpillar is also besieged by rising manufacturing costs. In the first quarter, Caterpillar’s manufacturing costs rose by a hefty $375 million due to higher costs of raw materials, freight and labor. $70 million of these costs were tariff-related from America’s ongoing trade disputes. Caterpillar has been able to partially offset these higher costs through retail price increases, a program it implemented in the second quarter of last year.

In the upcoming months, Caterpillar’s investors will hope for greener pastures. On the plus side, the Federal Reserve has tempered its future interest rate hikes and the U.S.-China trade dispute appears close to resolution. However, the global economy continues to weaken, specifically with China – a major cog in Caterpillar’s revenue generating machine. But so far, in 2019, the frustration for its investors continues.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.