Caterpillar is Tuesday's IBD Stock Of The Day as the earthmoving heavy-equipment giant leads a push higher by machinery stocks. CAT stock cleared a buy point from a cup-with-handle base.
CAT stock started 2023 on a tear as investors followed the money — more than $1 trillion in federal outlays directed toward mining, manufacturing and infrastructure thanks to three big legislative packages signed by President Biden. And that doesn't include perhaps another $1 trillion in private investment incentivized by federal support.
Now CAT stock has caught a second wind. But in between, there were a few hiccups.
Bank Crisis, Inventory Issues Slowed CAT Stock In First Half
First, the regional bank crisis that broke out in March threatened a key funding source for commercial real estate projects. Then came the April 27 Q1 earnings report, which saw Caterpillar crush estimates but some cautious comments sent CAT stock lower.
Management said it expected dealer inventories to fall vs. Q1 levels. That acts as a headwind to sales, as dealers fill a portion of demand by shrinking their own inventory levels.
Further, Caterpillar said it expected less of a benefit from inflating its prices over its own manufacturing costs.
Meanwhile, China, which typically represents 5% to 10% of Caterpillar sales, has had a softer-than-expected recovery after lifting its Covid lockdown.
Industrial Construction Boom
Yet those bumps in the road are beginning to look pretty modest compared with the big trends that will drive Caterpillar's results in the years to come. The banking crisis appears to be stabilizing, and residential real estate, which accounts for 25% of construction industry revenue, has begun to surprise on the upside.
"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."
CAT Stock
Caterpillar stock rose 1.6% to 252.85 in Tuesday stock market action. That carried CAT stock past a 250.89 buy point from a 23-week cup-with-handle base.
CAT stock topped out at 266.04 on Jan. 27 before falling as much as 23%.
SwingTrader opened a position in CAT stock at 252.59 on Tuesday with the goal of a 5% to 10% profit.
Some of the same federal spending and technology trends supporting Caterpillar are also boosting other machinery stocks. United Rentals rose 2.8% to 457.32, clearing a 450.65 cup-with-handle buy point on a weekly chart, according to a MarketSmith analysis. URI is part of the flagship IBD 50 list of leading growth stocks.
Terex rose 3.2% to 60.89, climbing further into a buy range above a 58.85 handle entry.
Caterpillar's Q2 earnings are due before the open on Aug. 1.
