Caterpillar (CAT), the Dow Jones earthmoving giant, posted second-quarter earnings before Tuesday’s open that crushed estimates, but its order backlog fell sharply. CAT stock moved lower before the open.
Most aspects of the earthmoving giant’s businesses have been thriving amid a $1-trillion federal windfall supporting manufacturing, mining and infrastructure projects. That funding has years to run, but several things have been making Wall Street nervous.
Typically, CAT stock gets a valuation haircut when the order backlog begins to fall from its peak. Equipment dealers have added to inventories lately, but that could begin to change, partly because supply chains have largely normalized so there’s less urgency to have extra equipment on hand. Further, Caterpillar has said profit margins could come down as inflation recedes.
Also, the surge in mortgage rates could dampen the outlook for residential construction, which makes up one-fourth of Caterpillar’s construction business.
“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, CEO Jim Umpleby said in a June 20 investor presentation.
However, the EV race appears to be shifting into lower gear. Ford Motor (F) said last week that it will delay construction of a battery plant in Kentucky as it postpones $12 billion in investments.
Estimates: Analysts expected Caterpillar earnings to grow 21.5% to $4.80 a share as revenue climbed 10.5% to $16.57 billion, according to FactSet.
Results: Caterpillar EPS motored 40% to $5.52 as revenue grew 12% to $16.81 billion.
Caterpillar attributed $1.3 billion of the $1.8 billion in year-over-year sales growth to price increases, with about $350 million reflecting higher sales volumes. The rest came from currency adjustments and financial product revenue.
That translated to a 20.8% adjusted operating profit margin, down slightly from 21.3% in Q2.
Construction industry sales rose 12%, while sales for resource industries grew 9%. Sales to energy and transportation industries grew 11%.
Dealer inventories rose $600 million, which provided a boost to Q3 sales, though a bit less than the $700 million year-ago increase.
The order backlog decreased by $2.6 billion from Q2 after a $300 million rise in the prior quarter.
Outlook: Caterpillar expects Q4 operating margin to be lower than in Q3. Sales are seen up “slightly” vs. $16.6 billion in the fourth quarter of 2022.
CAT stock fell 4.1% to 232.30 in early Tuesday stock market action after bouncing 1.5% on Monday.
Caterpillar’s blowout second-quarter earnings on Aug. 1 marked an all-time high for CAT stock and the high-water mark for this year’s Dow Jones Industrial Average rally. But going into Tuesday morning’s Q3 report, CAT stock has gone from leader to laggard, falling 16% as the Dow has lost under 8%.
Last week, CAT stock fell below its 200-day moving average, which often indicates a long consolidation ahead — or worse. Reclaiming the 200-day is the first step to meriting a place on investors’ watchlists.
The latest downdraft for CAT stock picked up speed on Oct. 18, when smaller rival Terex (TEX) issued a disappointing earnings outlook. Terex sold off further after its Q3 report showed its backlog fell from record Q2 levels, though the company noted that its backlog was about triple its historical norm.
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