Caterpillar Inc. (NYSE:CAT) crushed estimates and raised guidance in its April 24 release — a great one-two punch. Some investors may have been surprised, but not me. This is a company everyone needs to pay attention to, not just because of how it is performing but because it is a good proxy for the global economy.
The company reported earnings of $2.82 a share, which was phenomenal 120% growth over last year and easily ahead of the Street around the $2.08-$2.10 area. Revenue jumped an impressive 31% to $12.86 billion, a big beat of estimates of $11.98 billion. Sales were strong around the world, with Asia-Pacific growing 44%, North America up 33%, Europe/Africa/Middle East up 25% and Latin America up 24%.
Even more important, management significantly raised expectations for the full year “based on our strong first-quarter results and higher demand across all regions and most end markets,” according to CEO Jim Umpleby. Previous earnings guidance was for $8.25-$9.25 a share but that was boosted to $10.25-$11.25.
This is great news for the global economy as CAT’s sales of construction and mining equipment were quite strong and management cited construction demand in North America and infrastructure strength in China. Global growth expectations were factored into the raised guidance, so we will have to keep an eye on trade and tariff tensions, but investors clearly liked what they saw.
The shares initially traded 4% higher on that news, but they made a massive reversal on commentary that margins may have peaked for the year. When discussing the company’s outlook, CFO Bradley Halverson spooked investors with this comment: “The outlook assumes that first-quarter adjusted profit per share will be the high watermark for the year.”
Amy Campbell, director of investor relations, reported that for the balance of the year “we expect material costs increase to be greater than price realization.” She also remarked that the company adjusted its modeling for a stronger China economy and I suspect better pricing power.
Those comments along with the overall market tenor wiped out the huge earnings beat and outsized guidance. I was surprised at the intensity of the reversal and how the stock stayed down in the immediate aftermath, but it was a classic example of how quickly panic-selling can beat down a stock.
CAT Stock Is Down but Not Out
CAT has had a shaken 2018 so far. In fact, just two months ago I told you that it was a mistake to sell this stock after it came under pressure due in part to tariff saber-rattling on industrial metals. It had been a strong performer in 2017 — raking among the top gainers in the Dow Jones Industrial Average — and I was confident that it would recapture its lost ground and then some.
Well, my outlook remains the same. While CAT did fall after earnings, it never touched long-term support at its 200-day moving average (the red line) or its even lows from earlier in April around $140. It consolidated in the low $140s for a few days and since then has not only bounced back to its pre-release levels but also recaptured its 50-day moving average (the blue line).
I said that CAT was cheap, trading with a PEG ratio of 0.83, but it’s even more attractive now as that figure has fallen to a bargain 0.58. I continue to see a lot of upside potential in this stock, and considering Wall Street has been raising its expectations for the year, I suspect the analysts do, too.
With the big picture remaining intact and catalysts in place to keep drive it higher, I continue to target prices around $190 or higher in the coming year.
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