Source: PaxForex Premium Analytics Portal, Fundamental Insight
Caterpillar's monthly retail sales figures (NYSE: CAT) are eagerly awaited by both shareholders and the market. They are a useful indicator of current trends, and the fact that they have recently shown some significant decline is not good news. There were some positive aspects to the report and the numbers were not as bad as they seem at first sight.
The data shows that machine sales have been declining for six consecutive months. Obviously, this is worrying and indicates that the company's profits will be under pressure in the future. However, there are three main reasons that investors should not lose sight of.
Firstly, these figures represent a three-month growth in rolling stock compared to the same period last year. There is little that Caterpillar dealers can do when faced with lockdowns and isolation measures. In short, what you see in the numbers is an external, temporary shock rather than a long-term company-specific problem.
A regional breakthrough gives better coloring to the major trends. China is the country of origin of COVID-19, and therefore it can be considered a leading indicator for the US and Europe. Total retail sales of cars in the Asia Pacific region have fallen by only 1% in the last period. Besides, in May, retail sales of three-month construction industry products in the Asia-Pacific region actually increased by 2%.
While it is important to note that this may only represent a release of deferred demand after the easing of the lockdown measures in Asia, it also serves as a reminder that current data in Europe and the US probably do not reflect the trend that is likely to follow when June's data begin to arrive at three-month retail sales data in those regions. Simply put, Caterpillar sales data will be better.
Third, there is evidence that some Caterpillar end markets are improving. For example, oil prices and cyclical metals, such as copper, have recovered from the lows seen at the beginning of the year, which may push oil, gas, and mining companies to cut their capital spending budgets.
Also, Union Pacific CFO Jennifer Hamann recently spoke at the conference about the strengthening of major highway projects leading to increased total supply, a positive sign for the demand for Caterpillar equipment for the aggregate machinery industry.
At the same time, the combination of a recovery in the Chinese construction market and opportunities to stimulate infrastructure spending in the U.S. may give Caterpillar an incentive for further development.
Caterpillar's sales performance was poor, but not bad enough to bring the company down in the long term. Put together, it is likely that Caterpillar's sales trends will recover in due course and, given the improvements made by management in the cost structure, it is likely that Caterpillar's current 3.2% dividend will be sustained.
For reference, the management previously said that the free cash flow will reach a bottom of $4 billion during the cycle, which will provide sufficient coverage for a $2.3 billion dividend.