Shares of Caterpillar (CAT – Free Caterpillar Stock Report) held relatively flat after the heavy equipment manufacturer reported surprisingly strong second-quarter results. Sales of $14.01 billion rose 24% over the year-ago period and beat our $13.28 billion call, as the company benefited from favorable conditions in most end markets. The company experienced higher demand across its three segments, led by the Construction Industries unit. The division capitalized on increased spending on construction equipment, primarily in oil and gas (including pipelines) and nonresidential construction.
Economies of scale helped the company overcome higher manufacturing costs, which were due to increased freight and materials expenses (especially for steel). Too, a reduction in the U.S. corporate tax rate beginning in 2018, along with changes in the geographic mix of profits from a tax perspective, supported net income. In all, share profits of $2.97 was nearly double the prior year figure and eclipsed our $2.65 estimate.
The stock had been on a two-year run and even etched a new all-time high earlier this year, but has since plunged in price as investors have grown worried about a potentially intensifying trade war. While higher tariffs would hurt the capital goods manufacturer's international operations, which generates a significant portion of Caterpillar's sales, leadership expects to manage the recently implemented policy.
Markets continue to improve, order rates remain healthy, and the backlog is strong ($17.7 billion). Notably, a gradual strengthening in crude prices has led to commensurate gains in orders from energy explorers and producers. Taking these factors together, we have raised our 2018 sales estimates by $1.88 billion, to $54.12 billion.
Based on the very impressive performance posted in the June period, as well as the first half of 2018, and continued strength in end markets, Caterpillar has once again raised expectations for the year. Management boosted its share-profit outlook from a range of $10.25 to $11.25, to $11.00 to $12.00. It is looking for recently imposed tariffs to lead to $100 million-$200 million in incremental costs during the second half of 2018, and for supply chain challenges to pressure freight costs. However, this venerable company is looking to offset the impact of these headwinds through recently implemented price hikes and cost discipline. Share repurchases ought to also help. After repurchasing $2.25 billion of CAT shares during the first half of 2018, the company has $4.20 billion remaining under its current authorization plan. We look for similar spending on this front in the second half of 2018. In all, we have revised upwards our bottom-line estimate by $0.75, to $11.50.
For investors with a long-term outlook, these shares remain appealing. However, prospective accounts should keep in mind that the stock will probably continue to be influenced by news regarding global trade policies.
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
