Caterpillar
crushed Wall Street’s earnings estimates for the second quarter but the stock wasn’t doing much in early trading. Investors weren’t worried about this quarter. They are worried about the economic cycle.
Caterpillar (ticker: CAT) reported on Tuesday adjusted earnings per share of $5.55 from sales of $17.3 billion. Wall Street was looking for earnings of $4.57 a share from $16.5 billion in sales. Caterpillar reported a profit of $4.91 a share from sales of $15.9 billion in the first quarter of 2023. In the second quarter of 2022, Caterpillar reported profit of $3.18 a share from sales of $14.2 billion.
Business strength was broad-based with sales and profits up year over year in Caterpillar’s construction, mining, and energy-related businesses. Profit margins improved year over year as well. The company’s adjusted operating profit margin was 21.3% for the second quarter, up from 13.8% for the second quarter of 2022.
“I’m proud of our global team’s strong operational performance in the second quarter,” said CEO Jim Umpleby in a news release. “Our team remains committed to serving our customers, executing our strategy, and continuing to invest for long-term profitable growth.”
It’s a big earnings beat and solid quarter. Still, Caterpillar stock was flat in premarket trading.
S&P 500
and
Dow Jones Industrial Average
futures were both down about 0.3%.
The initial reaction highlights how the stock market is always looking ahead. Things are good now, but Wall Street and investors are worried about a slowing economy even as the maker of heavy equipment stands to benefit from rising construction activity in the U.S.
That fear looks, at least, partially justified. Caterpillar indicated in its news release that sales and profit margins for the third quarter would be higher year over year, but down from the second quarter. Down isn’t what investors want. Still, it isn’t a surprise. That is the pattern analysts projected heading into the second-quarter earnings report.
Valuations show how investor sentiment has changed. At the start of 2023, Caterpillar stock was trading for roughly 17 times estimated 2024 earnings. Now it is trading for about 14 times.
The price-to-earnings ratio is down even though earnings estimates have been rising, showing investors aren’t willing to pay more for a stock that is expected to generate higher profits per share. At the start of 2023, Wall Street projected 2024 earnings per share of about $17. Now the figure is up to about $18.50.
Wall Street sentiment has shifted too. About 42% of analysts covering the stock rate it at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. A year ago, about 50% of analysts covering Caterpillar shares rated them Buy.
The average analyst price target for Caterpillar stock is about $255 a share, while the stock closed Monday at $265.19. A year ago, it was about $222.
Things are “slowly slowing,” wrote Baird analyst Mig Dobre in a report previewing earnings. Dealer inventories are rising, which can put downward pressure on equipment prices, and the backlog of orders is falling.
That is happening even as construction activity is booming, boosted by government-supported spending tied to new laws including the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. U.S. nonresidential construction activity is running at an annualized rate of roughly $1 trillion in recent months, at or near record levels.
For now, the potential negatives are balancing the potential positives. Dobre, for his part, rates Cat shares at Sell. He has a target of $183 for the stock price.
Management hosts a conference call at 8:30 a.m. Eastern time to discuss results. Analysts and investors will be interested to hear about how the current cycle is developing and what’s likely to come next.
Write to Al Root at [email protected]
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