Scott Pope: Caterpillar came out with its fourth-quarter earnings this morning, coming in at $0.44 below consensus EPS. More importantly its guidance for 2019 EPS was both below our estimate and below consensus. The principal problem in Q4 was a lower margin in its construction industry segment and to a lesser extent, there was some onetime charges to the financial services segment. Taking these factors into consideration, we are anticipating a meaningful reduction in our fair value estimate.
The four major takeaways from the earnings call this morning were, one, the U.S. economy looks strong for 2019, which supports healthy growth in Caterpillar's construction segment; two, Latin America was rather weak in Q4, and the recovery looks tepid; three, China was a little weak, and going forward we think that China revenue growth will be flat in 2019; and fourth, minor CapEx is expected to be strong in 2019 which would support healthy growth in Caterpillar's resource industry segment.
Taking all this into account, we are still rather positive on Caterpillar. In 2018 it generated its highest earnings per share despite being well below its peak revenue. The larger issue with Caterpillar is that management has demonstrated its ability to contain cost, streamline operations, and continue ongoing product development. For all these reasons, we think Caterpillar still remains an attractive investment.