Shares of Caterpillar (CAT – Free Caterpillar Stock Report) rose nicely after the manufacturer of heavy equipment beat first-quarter expectations. Sales of $12.86 billion eclipsed our $10.80 billion estimate and increased 31% over the year-earlier tally of $9.82 billion. The increase was powered by higher volumes, which reflected improved end-user demand across all regions and most end markets. The performance was highlighted by notable improvement in the Construction Industries unit, which experienced a 38% gain in sales, to $5.68 billion. Caterpillar also generated impressive gains in its other divisions (Resource Industries and Energy & Transportation).
Strength in many of the company's end markets, when combined with a continuing focus on cost controls, helped deliver wide operating margin expansion and a record first-quarter profit. Altogether, share earnings of $2.82 beat our $1.80 call and surpassed the $1.28 reported in the year-earlier period.
Various factors suggest the momentum will continue. Caterpillar noted an increase in dealer inventories, which management believes reflects current end-user demand. It looks for the Construction Industries unit to be driven by rising activity in North America and infrastructure development in China. Meanwhile, the recovery in Latin America and the Europe, Africa, and Middle East segment should strengthen amid stabilizing crude markets. The Resource Industries business expects positive global economic conditions and an overall more favorable commodity price environment to drive spending on equipment replacement. Lastly, the Energy & Transportation business ought to get a boost from sales into various oil and gas applications.
In January, Caterpillar provided a 2018 share-profit outlook range of $8.25-$9.25. Due to growing demand, the company has increased its outlook by $2.00 per share, to a range of $10.25-$11.25, adjusted for the exclusion of nonrecurring items. After the better-than-expected start to the year, we have hiked our top- and bottom-line estimates by $3.0 billion and $2.50, to $52.0 billion and $11.10 a share, respectively.
This latest share-price gain helped CAT stock recover some of the ground it lost due to fears of a possible trade war. Notably, Caterpillar generates roughly 60% of its sales in international markets. Given a recent thaw in relations between the U.S. and China on that front, the market's initial reaction appears to have been excessive.
About The Company: Caterpillar Incorporated is the world’s largest producer of earth-moving equipment. Major global markets include road building, mining, logging, agriculture, petroleum, and general construction. Products include tractors, scrapers, graders, compactors, loaders, off-highway truck engines, and pipelayers. Also makes diesel & turbine engines and lift trucks.
— Dominic Silva
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
