With nothing more than a quick glance at the headlines, it would be easy to conclude Caterpillar (NYSE:CAT) simply crashed and burned last quarter, crushed by geopolitical friction and an inability to respond to it. CAT stock lost more than 7% of its value on Tuesday after posting its third-quarter numbers, adding to the 19% pullback it had suffered since its early October peak as of Monday’s close.
And to be fair, Caterpillar did come up short … in a sense.
If for no other reason than the fact that it would make for a good mental exercise, however, investors may want to consider the possibility that the market’s response to the Q3 print was going to be firmly bearish no matter what.
If that’s the case, Caterpillar’s story may not be quite as grim as the stock’s performance would lead you to believe.
Caterpillar Earnings Preview
For the quarter that ended in September, Caterpillar turned $13.5 billion worth of revenue into earnings of $2.88 per share. The pros called for a profit of $2.83 per share of CAT stock on sales of $13.24 billion. The heavy equipment company earned on operating profit of $1.95 per share in the same quarter a year earlier, on revenue of $11.4 billion.
Caterpillar CEO Jim Umpleby commented “This was the best third-quarter profit per share in our company’s history,” and it was. The official statement from the company also noted “Most end markets continue to improve. Order rates and backlog remain healthy. In the fourth quarter, price realization, operational excellence and cost discipline are expected to more than offset higher material and freight costs, including tariffs.”
The catalyst for the selloff?
Most observers point to the company’s full-year guidance as the key culprit. Caterpillar reiterated its previous message that it would book 2018 profits of between $11 and $12 per share of CAT stock, versus the consensus of $11.64. The company had upped its bottom line projection for the year a couple of times, and the market was tacitly expecting another round of raised guidance. When they didn’t get it, they protested.
Or, at least that’s the official story.
At another time and in another situation, Caterpillar’s third-quarter numbers and full-year outlook would have been plenty palatable. This time around, though, the numbers were delivered to a market that may have already pre-decided no plausible results or guidance were going to be good enough.
Remember, news from its peers was notably ugly headed into Tuesday morning’s release. CAT stock was off 2.7% on Friday, driven lower by disappointing Q3 numbers and guidance from industrial peers like United Rentals (NYSE:URI) and Snap-on (NYSE:SNA). Snap-on’s sales fell by about 1% year-over-year, and fell well short of estimates. United Rentals managed to top is revenue and earnings estimates, but its stock slumped all the same after Macquarie cut its price target on concerns of a potentially tepid future.
Honeywell International (NYSE:HON) shares initially rose on the company’s third-quarter sales and earnings beats just a few days ago, but then fell back into the red after a member of its management explained during the earnings conference call “While we’re hopeful there is ultimately resolution to the situation, we’re planning for the worst and making structural changes including modified some sources of supply, seeking alternative sources and taking other commercial actions as necessary to position us for 2019 and beyond.”
And, perhaps more alarming, investors are taking these warnings at face value rather than thinking about the possibility that American corporations simply squawking as a way of squeezing every ounce of potential profits out of the revenue they’re already generating. Most alarming of all is that potential and current CAT stock owners were ready to see the glass as half-empty rather than half-full.
If that’s all this is, it’s not a headwind that’s built to last.
Bottom Line for CAT Stock
The truth is, as always, somewhere in the middle of the two extremes. New tariffs are hardly destroying Caterpillar, but it would be naive to think the near future will look as compelling as the recent past. Even CFO Andrew Bonfield in a post-earnings interview “For a company with a $50 billion top line, you can’t grow that fast forever, otherwise you would be one of the largest growth stocks rather than a cyclical industrial. That’s just not feasible. So, it just becomes the math in the end.”
On balance though, Caterpillar still has more going for it than not. And, with CAT stock now priced at a forward-looking P/E of only 9, the sentiment pendulum is apt to swing back in a bullish direction sooner than later.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.