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October 25th, 2019

Caterpillar Cuts Outlook

By PRATTE
Trading EN

Earnings influenced the markets throughout the week as many big US companies posted their quarterly reports. Caterpillar’s announcement of a lower revenue forecast for 2019 raised investor’s concerns as the company is considered the barometer of the US economy. The US dollar fell sharply in comparison with its Canadian counterpart, causing the value of US securities held by Canadian portfolio managers to fall. Here is what happened in the markets this week.

Market Brief

Optimism surrounding China-US negotiations gave the markets a boost on Monday. The Dow advanced 26 points, the NASDAQ gained 0.6% and the S&P 500 rose 1%. “Q3 earnings season so far is not as strong as the headlines indicate. Yes, Q3 earnings reports have been good thus far… But the amounts of these ‘beats’ on the bottom line are smaller than usual, even as revenues are actually better than expected” stated Nicholas Colas, cofounder of DataTrek. This good performance continued throughout the session as the three main indexes finished in the green.

US markets opened slightly higher Tuesday as investors were closely monitoring the latest earnings. Shares of Porter & Gamble gained 4.1% after posting good quarterly results. Meanwhile, McDonald’s shares fell 3.3% after poor earnings. The three leading US indexes finished Tuesday session in the red, led by disappointing quarterly results. “With the continuation of the earnings season, we are seeing more fragility in this third quarter,” notes Sam Stovall of CFRA.

Stocks opened in scattered order on Wednesday, as investors were digesting the latest corporate earnings from Boeing and Caterpillar. The Dow gained 38 points while the S&P 500 and the NASDAQ were down 0.1% at the open. Shares of Boeing were up 2.2% while Caterpillar was up 0.1% after a 6% drop pre-market. Shares from Texas Instrument were down 9% after announcing lower than expected earnings. The US stock market continued its progress throughout the session closing higher, supported by Boeing and Caterpillar.

Wall Street opened slightly higher on Thursday, led by Microsoft (+ 1.58%) and Tesla (+ 16.80%). Elon Musk’s company unveiled Thursday solid earnings, announcing a surprise profit. The CEO was confident in its ability to exceed its target to deliver at least 360,000 cars this year. Its stock closed up by 17% while Twitter shares were down 20% following bad earnings. “The miss (on revenue) wasn’t just because of tough comparisons, which were expected to dampen their revenue growth, but issues with their ad product. That could impact their performance in the all-important Q4,” noted Jasmine Enberg of eMarketer. The Dow closed the session lower, pulled down by shares of 3M (-4.07%), which is one of the top 30 stocks in the index. “The Dow Jones is made up of 30 stocks. If one or two of its members retreat, it can pull down the index as a whole” observes Art Hogan at National. “The Dow Jones is also a reflection of large multinationals, which are affected by the Sino-US trade war, the price of raw materials or the health of the industry,” adds the expert.

Stocks opened slightly lower on Friday pulled down by Amazon shares, down 3.7% after reporting on Thursday its first quarterly profit decline in more than two years and said it expects to see another fall during the holiday shopping season.

TSX opened higher on Monday, also driven by the optimism surrounding negotiations between China and the United States. Within hours of the Canadian election results, the TSX closed higher with gains in technology and energy sectors. BlackBerry gained 2.1% and the Hudson’s Bay stock jumped 6.3% after the announcement that it would accept the offer to buy a group of shareholders. Bay Street investors applauded the election results in Canada, pushing the TSX up 44 points at the opening on Tuesday, but ended the session lower, pulled down by Spotify 6% drop. The recent fall in oil prices pushed the energy sector back at the opening on Wednesday, dragging the TSX lower. Rogers Communication revealed that it had revised downward their annual revenue forecasts. As a result of this announcement, the company’s stock fell by 6%. This tumble continued throughout the session as Rogers shares closed down 8%, bringing the telecommunications sector down (-5.1%) and the TSX, who ended lower by 55 points. TSX was back on track on Thursday, supported by the rise in gold prices and the publication of strong earnings. Canada’s main stock index opened lower on Friday, as losses from tech companies offset advances made by precious metal miners pushed by higher gold prices.

Boeing

Uncertainty over the company’s transparency influenced the performance of the stock down 3.8% on Monday. Overall, the company has lost more than 10% since Friday. Disclosure of shared e-mails between employees of the company also caused the stock to fall. In these e-mails, the employees insinuated that the automatic system, the MCAS, was unreliable. The system seems to be unable to alert pilots when the aircraft (737 MAX) must go into a dive, which makes it much more difficult to fly the aircraft. The messages disclosed by the parliamentary commission showed that employees felt pressured regarding the safety approval of the 737 Max aircraft.

“We understand and regret the concern caused by the release Friday of a Nov. 15, 2016 instant message involving a former Boeing employee, Mark Forkner, a technical pilot involved in the development of training and manuals. And we especially regret the difficulties that the release of this document has presented for the U.S. Federal Aviation Administration and other regulators.” The two fatal crashes that killed more than 300 people have weighed heavily on the company. Its stock lost more than 18% in recent months.

The company posted deceiving earnings on Wednesday, with a 50% drop in profits plummeted by a 67% drop in commercial aircraft deliveries. “The company anticipates that the approval for the return to service of the 737 MAX will begin in the fourth quarter of 2019 and will (therefore) gradually increase 737 production from 42 units per month (currently) to 57 by the end of 2020,” announced the aeronautical manufacturer announced while warning investors that the schedule will be determined by the regulators. This announcement seemed to reassure investors, boosting the stock by 3% at the opening on Wednesday.

McDonald’s

The fast-food giant announced on Tuesday lower than expected earnings. McDonald’s announced a 1.8% decline in its net profit and a turnover up 1.14% to 5.43 billion, below the 5.49 billion anticipated by analysts. On a like-for-like basis (in number of stores), sales grew by only 4.8% in the United States, far from the 5.17% increase expected. These numbers show that McDonald’s is losing more and more market share to its competitors as they offer much more appealing menus including vegetarian burgers and nuggets. Burger King was the first to offer a vegetarian menu with his “Impossible Whopper,” his version of a veggie burger, while KFC began serving kibbles and chicken wings made from vegetable protein.

The company announced in September that it would test a veggie burger in partnership with Beyond Meat in its Ontario restaurants, a delay reflected in its latest earnings. After the announcement of its results, shares were down 3% at the open on Tuesday. McDonald’s stock gained more than 14% since the beginning of the year.

Caterpillar

The company, which is considered the barometer of the global industrial economy, has announced in its quarterly results a decrease in its anticipated revenues for 2019. Caterpillar manufactures so much equipment in the world that a decline in its activity often indicates a more general slowdown in construction and factory activity. Low demand for its products usually means a decline in construction, which augurs poorly for global economic growth.

“In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” said CEO Jim Umpleby, adding that Caterpillar is ready to respond swiftly to any positive or negative developments in the global economy next year. The company posted disappointing earnings, seeing its turnover fall by 6% to $12.8 billion, while analysts had estimated it to 13.57 billion. Net income, meanwhile, declined 13% to $1.5 billion. “Our volumes were down because dealers reduced their inventories and end-user demand, while positive, was less than we expected,” said Umpleby. The stock was down 5% before the opening on Wednesday.

 

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
Intended to provide general information about markets and securities and not to meet your specific needs, this report is the result of the author’s only work. The opinions (including any recommendations, if any) expressed in this report are those of the author only and do not necessarily represent those of Pratte Portfolio Management and do not constitute securities investment advisory activities designed to meet your specific needs.
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