Kudos to Caterpillar Inc. (NYSE:CAT), and congratulations to shareholders who stuck with their position heading into this morning’s fiscal Q1 earnings report. CAT stock had gained 24% since its Q1 2016 report, and it wasn’t entirely clear last quarter’s numbers wouldn’t result in a selloff … let alone a big post-earnings surge.
As it turns out, those faithful fans knew what they were doing.
If you take a closer look at last quarter’s results though, and cross reference them with the industry’s backdrop, Caterpillar — along with most other infrastructure stocks like Deere & Company (NYSE:DE) or Hitachi Construction Machinery (OTCMKTS:HTCMF) — may be even healthier than a quick glance at the news briefs suggest.
Caterpillar Earnings Wrap-up
For the quarter ending in March, heavy construction and mining equipment maker Caterpillar posted income of $1.28 per share on revenue of $9.82 billion. Both were up from year-ago figures of a profit of 64 cents per share and sales of $9.46 billion.
And, perhaps more central to the 7.4% jump CAT stock dished out today, the reported numbers handily topped expectations for a profit of 62 cents per share and revenue of $9.27 billion.
The beats weren’t the most interesting parts of the earnings report. What’s most interesting is where the growth came from: resource industries (mining machinery) and its Asia/Pacific customers. Revenue generated by Caterpillar’s Asian buyers was up 12% year-over-year, to $1.97 billion. Sales of resources-related equipment were up 15%.
The two stratifications were among the hardest hit beginning in 2014, when an oil-led implosion of commodities eventually led to a slowdown in China’s infrastructure spending. Last quarter’s numbers are something of a light at the end of the tunnel.
And yes, the future explicitly looks bright on both fronts.
For CAT Stock, The Best Is Yet to Come
Despite the frequently voiced doubts, China’s economic engine has continued to rev as well. March’s factory activity — as measured by its Purchasing Managers’ Index (PMI) — grew to 51.8, which was the highest reading since April of 2012. Construction was the big driver of that progress.
Separately, the initial estimate for the country’s GDP growth rate in the first quarter was 6.9%, topping expectations.
China being China, it’s apt to spend heavily to keep that momentum going as long as it can. Caterpillar and other U.S. infrastructure stocks will play a prominent role in that investment. But it’s not just construction activity in China that bodes well for CAT stock. There, and domestically, mining activity continues to heat up as commodity prices rebound.
Case(s) in point: Coal prices are stabilizing at prices not seen since 2014, having nearly doubled since early 2016. Ditto for oil prices. Miners and drillers are building their capacity to unearth the stuff.
In the meantime, construction projects started in March were up 5%, with the bulk of that increase being driven by non-residential buildings that tend to be bigger, and require larger equipment than a home-build does. March’s hotel construction in the U.S. last month was up 14.4% year-over-year.
Point being, the undertow is one that favors Caterpillar beyond last quarter’s solid results.
Perhaps the most amazing matter packed into the Q1 report for owners of CAT stock, though, wasn’t discussed at all. That is, Caterpillar mustered a truckload of overseas growth not because a weakening dollar made its ware more affordable to foreign buyers, but despite the fact that the U.S. dollar was even more unusually strong during the first quarter than it had been in years.
The chart of the U.S. Dollar Index tells the tale.
Click to Enlarge Note that since the end of the fiscal/calendar quarter, the U.S. dollar has set the stage for a breakdown.
Not only will that make Caterpillar’s machinery even more affordable to foreign buyers, it will boost the relative value of commodities, inducing more demand for mining and excavating equipment.
Don’t read too much into the optimism. Caterpillar is on the road to recovery, and the markets it needs to do well are legitimately doing well. It’s bound to be a bumpy ride for CAT stock, though.
Even within the earnings release the company acknowledged this, saying:
“While Caterpillar had strong first-quarter performance and is seeing signs of recovery in several of the industries it serves, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year.”
Fair enough. Even so, Caterpillar wasn’t too fearful of the future to not up its full-year outlook. Now it expects to earn around $3.75 per share on sales of between $38 billion and $41 billion. That’s up from a previous revenue forecast of between $36 billion and $39 billion. CAT was only looking for a 2017 profit of $2.90 per share a couple of months ago. The new figures are up from last year’s top and bottom line.
But, based on the geographic and industry undertows underway, the revisions sound about right.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.