Caterpillar earnings delivered a huge positive surprise early Thursday, signaling the global economic backdrop remains solid as recession fears grow. CAT stock, an S&P 500 bellwether tumbled intraday but pared losses as the broader market rallied strongly.
The earthmoving heavy-equipment giant, a Dow Jones component, didn't offer specific guidance, but said Q2 sales should rise vs. Q1, in line with normal seasonality. The earnings release also said Caterpillar expects "strong sales to users and no significant change in dealer inventory" this year vs. year-end 2022.
However, Caterpillar management provided more detail on the conference call, indicating that dealer inventories rose in Q1 and will end the year below Q1 levels. That means equipment dealers will fill some of their sales orders by shrinking inventory, so dealers won't order as much equipment from Caterpillar.
Federal infrastructure spending, the Chips Act and the Inflation Reduction Act are expected to be major supports for nonresidential construction activity in the next few years. The key question is whether that support will offset soft housing and other nonresidential construction later this year and into 2024. Regional banks play an important role in commercial construction lending.
Umpleby acknowledged concern about a commercial real estate slowdown. But he highlighted Caterpillar's modest exposure to North American commercial real estate, which accounts for 1% of its construction industry sales.
Caterpillar Earnings
Estimates: Analysts expected Caterpillar earnings per share of $3.80, up 32% from a year ago, on 12% sales growth to $15.25 billion.
Results: Caterpillar posted adjusted EPS of $4.91, up 70.5% from the year-ago $2.88. Revenue grew 17% to $15.86 billion, a modest deceleration from 20% growth in Q4.
Outlook: However, CFO Andrew Bonfield noted on the earnings call that the recent trend of price increases outpacing manufacturing cos increases is waning. As a result, adjusted operating profit margin is expected to be lower in Q2 than in Q1, in line with normal seasonality.
Going into earnings, the recent trend for CAT earnings estimates had been higher, not lower. Analysts predicted EPS of $15.95 this year, up from 2023 estimates of $15.41 three months ago.
CAT Stock
In Thursday stock market action, CAT stock dipped 0.9% to 214.33 but after tumbling to a six-month low of 204.04 in morning trade. Still, shares closed below the 200-day moving average.
But the S&P 500 jumped 2% on Thursday.
Still, the move below key support for CAT stock could be a negative signal for the broader S&P 500, given its bellwether role.
CAT stock's big rally from the start of October to late January came as the industrial, materials and energy sectors led the S&P 500 rally off its bear-market low. CAT stock rallied more than 60% over that period. Meanwhile, the S&P 500 climbed 17% from its Oct. 12 closing low to its Feb. 2 rally peak.
CAT stock's fall, which began with its Jan. 31 earnings report, preceded a rally peak for the S&P 500 by just two days.
Heavy-equipment rental firm United Rentals slightly missed earnings views late Wednesday. Although United Rentals did top sales estimates, URI stock fell 4.7% on Thursday.
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