The most recent quarterly report from bulldozer maker Caterpillar (NYSE:CAT) left shareholders concerned about its future — and China’s economy in general — if the 5.5% setback CAT stock has suffered since its release is any indication.

Investors should be wary of drawing sweeping conclusions though. Caterpillar’s caution could be more boilerplate than it seems on the surface, and China may not be in the dire straits some investors have been led to believe.

That’s the long way of saying the pullback may ultimately serve as a good entry point into an underestimated and now undervalued Caterpillar stock, if …

Quarter in Focus

The broad numbers were solid enough. Sales of $13.47 billion just topped expectations of $13.46 billion, but were up 5% year-over-year. Per-share earnings rolled in at $2.94, up two cents from the year-ago’s $2.82, and handily topping analyst estimates of $2.86 per share of CAT stock.

It was the fine print that failed to thrill investors. Namely, its overseas business was a letdown. Sales to Latin America’s construction customers fell 7%, and Europe-Africa-Middle East constriction business slumped 6%.

It was China, though, which makes up roughly one-tenth of Caterpillar’s business, that spooked investors. Sales of construction equipment to the world’s second-largest economy slumped 4% year-over-year, underscoring the impact of largely unpopular U.S. tariffs on China that have stymied trade between the countries.

Those tariffs have proven to be a two-way challenge. Tariffs on steel imported from China into the U.S. have kept prices high after they nearly doubled between 2016 and 2018. But, Caterpillar must also still account for fees paid to sell goods in China. The rhetoric in the meantime has evolved into chatter that the tariff war itself has hurt China’s economy, crimping demand for heavy construction equipment regardless of its cost.

The headwind that’s proving problematic for Caterpillar though — or at least owners of CAT stock — may be more unique to the company than suggested.

Stronger Than It Seems

The tariffs have worked as planned, to be clear. China is seeing measurable slowdowns of its economic engine, which were meant to bring the country to the negotiation table and ultimately prompt it into lowering admittedly steep tariffs on U.S.-made goods shipped there. Last year’s economic growth was the slowest China had seen in decades.

The country’s hardly been brought to its knees, though, and not every segment of its economy is in trouble.

China’s manufacturing industry, for instance, returned to growth in March after a four-month hiatus. The Caixin/Markit Manufacturing Purchasing Managers’ Index improved from 49.9 to 50.8, and now stands at its highest level since the middle of 2018 when the tariff wars had just begun in earnest.

It was artificially induced growth, to be clear. China has introduced stimulus and offered bailouts to critical entities. Nevertheless, those efforts appear to be working.

China’s headwind also delivered a blow to the nation’s construction industry, where Caterpillar was vulnerable. Sales of cranes and excavators improved by more than 60% during January and February though, fueled by its government’s stimulus package. Sales of heavy trucks grew 4% in March.

But, those buyers just weren’t buying Caterpillar-made equipment as they had in the recent past.

Bottom Line for CAT Stock

Caterpillar isn’t completely alone in its struggle to figure out how to handle its China problem. Water heater company A.O. Smith (NYSE:AOS) projects sales in China will slump between 3% and 6% this year, largely leaving the company out of whatever construction and replacement business is being mustered by China’s stimulus. Dow mainstay 3M (NYSE:MMM) announced on Thursday it would be cutting 2,000 jobs after falling short of last quarter’s earnings estimates, mostly thanks to weakness in sales to China.

China isn’t universally the liability it’s being made out to be, though. It’s dented and dinged to be sure, but not down for the count, and not yet past the point of renewed growth.

To that end, should the political standoff fueling the trade war abate, CAT stock immediately becomes a compelling investment prospect again. China is already/still doing reasonably well enough. It just needs a good enough reason to consider Caterpillar’s wares again.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.