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Caterpillar Shares Have Limited Upside Ahead

Caterpillar shares

Caterpillar (NYSE: CAT) shares bounced sharply in the past few months amid expectations for the trade agreement between the two largest economies. Unfortunately, slowing economic growth and higher inventories have been negatively impacting its financial numbers.

The lack of financial growth is likely to create pressure on its share price in the short-term. Slow economic growth combined with higher inventories has forced the machinery maker to reduce its production plans.

CAT Caterpillar Inc. daily Stock Chart

The company says customers are waiting to see the outcome of trade talks and the economic environment before buying new products. Caterpillar shares are currently trading around $140, down slightly from the 52-weeks high of $148 a share.

Lower Financial Numbers are Likely to Limit Caterpillar Shares Upside

The company has been experiencing a steady decline in sales over the past few months. For instance, its three-month rolling sales growth in the region slowed to 4% in October. This represents the slowest growth since mid-2017.

The company had also missed third-quarter revenue and earnings estimates. In addition, it has lowered the outlook for the full year. Its third-quarter sales declined 6% from the same period last year. The earnings per share dropped 8% from the year-ago period.

Caterpillar Shares Have Limited...

Our volumes declined as dealers reduced their inventories, and end-user demand, while positive, was lower than our expectations,” said Caterpillar Chairman and CEO Jim Umpleby.

Poor Financial Numbers Could Also Impact Cash Returns

Caterpillar is famous for offering strong cash returns to investors. It is among the dividend aristocrats as it has raised the dividends in the past 26 years in a row. However, poor financial numbers could also create a negative impact on dividend growth and share buybacks.

Caterpillar Shares Have Limited...

The company expects to generate earnings per share in the range of $10.90 to $11.40, compared to previous guidance of $12.06 to $13.06 range. The huge decline in earnings creates pressure on its payout ratio, which is currently standing around 40%. Overall, Caterpillar shares need support from financial numbers.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.