By all accounts, Caterpillar Inc. (NYSE: CAT) delivered a blow out first quarter. Growth was incredibly impressive across the board, yet Caterpillar stock fell $10 per because the company said that this would be the best quarter for the year. I personally don’t see the logic behind the price decline given how stellar the numbers were, but welcome to this crazy stock market.
I want to go through the numbers of this earnings report because they tell a very important story about the direction of the economy and possibly the stock market.
A Closer Look at Caterpillar Stock
Overall, revenues in construction industries rose an astonishing 38% to $5.67 billion. There was strength in every geographical region across the board, with Asia/Pacific up 46% and resource industries increasing 31%.
Energy and transportation rose 26%. Again, the Asia-Pacific sector rose 48%, which offset a mere 2% increase in Latin America. Finally, machinery, energy and transportation saw a 33% increase to $12.15 billion.
In total, Caterpillar stock first-quarter revenues rose an amazing 31% to $12.86 billion. Business is clearly booming. So this selloff happened because these incredible numbers are going to represent the best numbers of the year? I’m sure most companies only wish that was the case.
On the operating profit level, Caterpillar stock delivered $2.48 billion up from $1.44 billion, after backing out one time events. Again, we’re looking at an astonishing increase of 70%.
A Bigger Picture
So what do these numbers mean for Caterpillar stock and the rest of the market as a whole, not to mention the economy?
The company attributed the huge increase in sales volume to, quite simply, high demand. Dealers have been increasing inventories and that in turn has signaled that end-user demand has been on fire. That has been practically true in North America and in China.
Now remember, these amazing numbers are the first quarter’s results from 2018. This is not some artificial boost based on psychology. Clearly, President Trump’s economic policies are filtering through the economy in a very real way. GDP growth has been impressive, and it is perhaps a combination of both psychology and actual activity that has resulted in these amazing numbers.
While things could change on a dime for any number of reasons, CAT stock management said they don’t see any big geopolitical risks coming at them the rest of the year. What they do see coming at them is the possibility of higher costs because of the potential trade war, which would result in higher steel costs.
Higher steel costs would obviously impact margins. So that may be one reason why the company said were probably not going to see margins better than we did this quarter.
It is possible that some of these costs might be offset by improving conditions in Latin America, which had been pretty bleak until recently.
The Bottom Line
Taking this all to the Caterpillar stock bottom line, adjusted profit per share rose from a $1.28 per share to $2.82 per share. That was obviously a terrific increase. As a result of this, management has lifted the full-year outlook from a range of $8.25-$9.25 per share to $10.25-$11.25 per share.
Therefore, we are looking at CAT stock trading at only 14x 2018 estimates. Considering that analysts project five-year annualized earnings growth of 20%, it seems to me that CAT stock is significantly undervalued here.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
