Caterpillar, the Dow Jones earthmoving giant, posted second-quarter earnings before Tuesday's open that flattened estimates. CAT stock surged in Tuesday's stock market action, clearing a new buy point. Most aspects of Caterpillar's business are thriving amid a $1-trillion federal windfall supporting manufacturing, mining and infrastructure projects.
CAT stock went through a valley despite crushing Q1 earnings estimates on April 27. Investors turned cautious after management said it expected dealer inventories to fall vs. Q1 levels. That implied a headwind to sales, as dealers fill a portion of demand by shrinking their own inventory levels. Caterpillar also noted that it expected less benefit going forward from inflating its own prices over its manufacturing costs.
But the favorable CAT stock reaction to Q2 results came amid bullish guidance on margins. The Q2 earnings presentation noted that rising inventories at dealers added $1 billion to Q2 sales vs. the year-ago period. CAT stock gains escalated after management said on the earnings call that it's "very comfortable" with dealer inventory levels. Still, the commentary noted that inventories may decline in the second half of 2023, assuming supply chain concerns continue to fade.
Caterpillar Earnings
Estimates: Analysts expected Caterpillar earnings per share of $4.57, up 44% vs. Q2 2022. Revenue was seen growing 15.7% to $16.49 billion.
Results: Caterpillar EPS leapt 75% to $5.55 a share, nearly a dollar ahead of estimates and even faster than 70% growth in Q1. Sales grew 22% to $17.32 billion, a pickup from 17% growth in Q1.
Including inter-segment sales, construction industry sales grew 19% to $7.2 billion. Resource industry sales rose 20% to $3.6 billion. Energy and transportation sales jumped 27% to $7.2 billion, and financial product sales rose 16% to $923 million.
Outlook: Caterpillar said Q3 sales will come in below Q2 levels, which would be consistent with analyst expectations for $15.95 billion in Q3 sales. The order backlog rose by about $300 million from Q1 and $2.2 billion from a year ago.
Caterpillar said it expects full-year adjusted operating profit to be close to the top end of its target range. The company offers a profit-margin target range that rises along with revenue. The guidance appears to indicate potential for profit margins to approach or possibly exceed 19%.
CAT Stock
CAT stock surged 7.4% to 284.88. On Monday, CAT stock climbed 1.8% to 265.17, leaving it slightly extended from a 250.89 buy point from a 23-week cup-with-handle base, according to a MarketSmith analysis. That buy zone runs through 263.43.
However, CAT stock has an alternate handle or shelf providing another entry at 265.40. CAT stock gapped above that level, hitting an all-time high. CAT stock powered right through the new buy zone that runs to 278.67.
As of Monday, CAT stock made up 4.8% of the price-weighted Dow Jones. That ranks No. 6 among the Dow Jones 30.
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On Monday, United Rentals, a heavy-equipment rental firm, climbed 4.2% to 464.68, flashing an early entry.
On Tuesday, URI stock added 1% to 469.52, flirting with a 446.90 cup-with-handle buy point, but investors could use Friday's intraday peak of 459.30 as an early entry.
Industrial Construction Boom
"The 75% (of CAT's construction business) that is nonresidential is quite strong," CEO Jim Umpleby said in a June 20 investor presentation arranged by BofA. "And we are quite bullish about what we see coming in." He noted that CAT Financial also should help shield the company from the impact of any pullback among commercial banks.
Nonresidential strength, he said, is underpinned by the Inflation Reduction Act, the Chips Act and the 2021 infrastructure law.
Caterpillar has a hand in "the high-tension lines that have to be built, the wind turbines, the charging stations" to power the energy transition, Umpleby said. "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."
Commerce Department data shows that spending on manufacturing construction hit $194 billion at an annual rate in May, up 76% from a year earlier. Over the same period, spending on highway and street construction has grown 14% to $125.3 billion.
Umpleby also noted "a lot of strength" in Caterpillar's energy and transportation business. He highlighted generators for data centers, whose need is fueled by "everything moving to the cloud" and artificial intelligence.
Its resource industry business also is benefiting from an increase in mining activity that is a long-term story. "The average electric vehicle takes six times as many minerals as an internal combustion engine car."
