Caterpillar (CAT), the Dow Jones earthmoving giant, reported impressive second-quarter earnings that surpassed expectations, although its order backlog experienced a significant decline. As a result, CAT stock initially dropped in pre-market trading.
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Most facets of Caterpillar’s business have thrived due to a $1 trillion federal windfall that supports manufacturing, mining, and infrastructure projects. While this funding is slated to continue for years, there are some concerns on Wall Street.
Typically, CAT stock experiences a drop in valuation when the order backlog begins to decline from its peak. In recent times, equipment dealers have been increasing their inventories. However, this trend may change as supply chains normalize and the urgency for excess equipment diminishes. Additionally, Caterpillar has warned that profit margins may decrease as inflation subsides.
Moreover, the surge in mortgage rates may dampen the outlook for residential construction, which constitutes one-fourth of Caterpillar’s construction business.
“If you go to one of those big battery plants or a big chip plant, you will see literally hundreds of pieces of construction equipment,” said CEO Jim Umpleby in a June 20 investor presentation.
However, the electric vehicle race seems to be slowing down. Ford Motor (F) recently announced a delay in the construction of a battery plant in Kentucky, along with postponing $12 billion in investments.
Caterpillar Earnings
Estimates: According to FactSet, analysts expected Caterpillar earnings to increase by 21.5% to $4.80 per share, with revenue climbing 10.5% to $16.57 billion.
Results: Caterpillar’s EPS soared 40% to $5.52, while revenue grew 12% to $16.81 billion.
Caterpillar attributed $1.3 billion of the $1.8 billion year-over-year sales growth to price increases, with about $350 million reflecting higher sales volumes. The remaining growth came from currency adjustments and financial product revenue.
This translated to an adjusted operating profit margin of 20.8%, slightly lower than the 21.3% reported in Q2.
Sales in the construction industry rose by 12%, while resource industries experienced growth of 9%. Sales to the energy and transportation sectors increased by 11%.
Dealer inventories rose by $600 million, which will boost Q3 sales, although the increase was slightly lower than the $700 million recorded in the previous year.
The order backlog decreased by $2.6 billion from Q2, following a $300 million rise in the prior quarter.
Outlook: Caterpillar anticipates a lower operating margin in Q4 compared to Q3. Sales are expected to increase “slightly” versus $16.6 billion in the fourth quarter of 2022.
CAT Stock
CAT stock declined by 4.1% to $232.30 in early Tuesday stock market trading, following a 1.5% increase on Monday.
After Caterpillar’s outstanding second-quarter earnings on August 1, CAT stock reached an all-time high and was a driving force behind this year’s rally in the Dow Jones Industrial Average. However, leading up to the Q3 report on Tuesday morning, CAT stock has transitioned from a leader to a laggard, dropping by 16% compared to the Dow’s 8% decline.
Last week, CAT stock fell below its 200-day moving average, which often indicates an extended period of consolidation or possible further decline. Reclaiming the 200-day moving average is crucial to regain investor confidence.
The recent decline in CAT stock gained momentum on October 18, following a disappointing earnings outlook from smaller rival Terex (TEX). Although Terex revealed a decline in its backlog from the record levels seen in Q2, the company noted that its backlog was still triple its historical average.
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