Shares of heavy equipment manufacturer Caterpillar (CAT – Free Caterpillar Stock Report) have fallen sharply in price, despite a better-than-expected performance in the third quarter. Sales surged 18% over the year-ago period, to $13.5 billion, and eclipsed our $13.0 billion call. The top line was driven by higher volumes across all three segments. The Construction Industries unit capitalized on improved conditions, especially in North America, where demand for new equipment used in oil and gas activities firmed. The Resource Industries division benefited from elevated investments in both mining and heavy constructions arenas. Lastly, the Energy & Transportation business gained from increased demand across all applications, except industrial.
The healthy top-line advance overcame a rise in manufacturing costs, which reflected higher freight and material expenses due to increased steel prices and tariffs. Freight costs were hurt by supply chain efficiencies, as the industry continues to respond to strong global demand. SG&A and research and development expenses remained high due to investments in various growth initiatives. Altogether, Caterpillar reported a 47% share-net gain over the year-ago period, to $2.86, which beat our $2.81 estimate. Moreover, this was the best third-quarter profit performance in the company's long history.
Operating conditions appear to be sound for the economic bellwether. In fact, most end markets continue to gain strength. Order rates and backlog remain healthy. Furthermore, ongoing benefits from operational efficiency programs and enhanced cost discipline are expected to help. However, Wall Street is concerned that trade frictions, which have boosted the prices of various metals, will remain at the forefront. Amid strong global demand and U.S. tariffs, the price of steel has risen nearly 30% this year. In order to offset higher input costs, Caterpillar continues to rely on increased prices. We are not sure this is a sustainable policy since the company sells to certain industries that have probably reached their peaks.
Geopolitical factors likely led Caterpillar to maintain the adjusted profit-per-share outlook of $11.00-$12.00. We are taking a cautious stance and keeping our 2018 top- and bottom-line estimates of $53.87 billion and $11.50, respectively, intact. The stock had been on a two-year run and even established a new all-time high earlier this year, but has since pulled back in price as investors have grown worried about a potentially prolonged trade war.
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
