Caterpillar topped Wall Street’s earnings estimates for the second quarter, but the stock hasn’t performed particularly well in early trading. Investors weren’t worried this quarter. They are concerned about the business cycle.
Caterpillar (ticker: CAT) on Tuesday reported adjusted earnings per share of $5.55 on sales of $17.3 billion. Wall Street expected earnings of $4.57 per share on sales of $16.5 billion. Caterpillar reported earnings of $4.91 per share on sales of $15.9 billion for the first quarter of 2023. In the second quarter of 2022, Caterpillar reported earnings per share of $3.18 on sales of $14.2 billion.
Business strength was broad-based, with sales and earnings in Caterpillar’s construction, mining and energy businesses increasing year over year. Profit margins also improved year-on-year. The company’s adjusted operating income margin was 21.3% in the second quarter, compared to 13.8% in the second quarter of 2022.
“I’m proud of the strong operational performance of our global team in the second quarter,” said CEO Jim Umpleby in a press release. “Our team remains committed to serving our customers, executing our strategy and continuing to invest in long-term profitable growth.”
It’s a big earnings uptick and a solid quarter. Still, Caterpillar shares were flat in premarket trading.
S&P 500
And
Dow Jones Industrial Average
Futures were both down about 0.3%.
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The first reaction shows that the stock market is always looking ahead. Things are good for now, but Wall Street and investors are worried about a slowing economy, although the heavy equipment maker should benefit from rising construction activity in the US
This fear appears to be at least partially justified. Caterpillar noted in its press release that third-quarter sales and profit margins would be higher year-on-year but below those of the second quarter. Down is not what investors want. Still, it’s no surprise. This is the pattern analysts were predicting ahead of the second-quarter earnings report.
Valuations show how investor sentiment has changed. At the start of 2023, Caterpillar stock was trading for about 17 times estimated 2024 earnings. It’s about 14 times that now.
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The price-to-earnings ratio has fallen despite rising earnings estimates, showing that investors are unwilling to pay more for a stock expected to produce higher earnings per share. At the start of 2023, Wall Street was forecasting 2024 earnings per share of around $17. Now the value is around $18.50.
The mood on Wall Street has also changed. Roughly 42% of analysts rate the stock a “buy.” The average buy rating for stocks in the S&P 500 is about 55%. A year ago, about 50% of the analysts covering Caterpiullar shares gave it a “buy” rating.
Analysts’ average price target for Caterpillar stock is around $255 per share, while the stock closed at $265.19 on Monday. A year ago it was about $222.
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Things are “slowly slowing down,” Baird analyst Mig Dobre wrote in a report previewing earnings. Dealer inventories are rising, which can put downward pressure on equipment prices, and backlogs are falling.
This is happening even as construction activity is booming, boosted by government-sponsored spending related to new legislation like the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. Non-residential construction activity in the US has been about $1 trillion on an annualized basis for the past few months, at or near record levels.
Right now, the potential negatives outweigh the potential positives. For his part, Dobre rates Cat shares as a sell. His target price is $183.
Management will host a conference call at 8:30 am ET to discuss the results. Analysts and investors will be excited to see how the current cycle plays out and what’s to come next.
Write to Al Root at [email protected]
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