Machinery company Caterpillar continues to surpass earnings expectations, yet it faces concerns over a declining orders backlog. Shareholders must assess whether the current strong performance can mitigate apprehensions about the future state of the global economy.
Management Insights and Economic Outlook
On Tuesday, management will address stakeholders to provide further details on the order backlog and offer insights into the economic landscape as we approach 2024.
Impressive Earnings
In its latest report, Caterpillar (ticker CAT) revealed earnings per share (EPS) of $5.52 from sales totaling $16.8 billion. This exceeds the Wall Street forecast of an EPS of $4.80 per share from sales of $16.6 billion, according to FactSet. Comparatively, Caterpillar reported an EPS of $3.95 from sales of $15 billion one year ago.
Driving Factors
Increased prices and augmented shipment volumes to customers contributed to the rise in sales. As end markets recover from the impact of Covid-19, supply-chain challenges ease, and lower dealer inventories improve production, Caterpillar seizes the opportunity for higher sales.
The boost in pricing accounted for approximately $1.3 billion, while volumes contributed around $350 million to third-quarter sales. Notably, pricing was higher across all segments, while volumes rose in the construction and energy business sectors. However, volumes decreased with mining customers.
Investor Response
Initially, Caterpillar’s stock experienced a surge following the release of its results. Nevertheless, gains were eventually relinquished, resulting in a 3.2% decrease during premarket trading. In contrast, S&P 500 futures rose by 0.2%, and Dow Jones Industrial Average futures increased by 0.3%.
Despite an impressive earnings report, investors remain cautiously optimistic and refrain from declaring complete victory at this stage.
Caterpillar Faces Investor Attention Shift as Backlog Decreases
Caterpillar, the global construction machinery manufacturer, recently released its earnings report for the first and second quarters of 2023. In an earnings preview report, Baird analyst Mig Dobre stated that investor focus during this period was on the potential margin upside resulting from the normalization of supply chains and price/cost tailwinds. However, as the company enters the next phase, attention will now shift to the progression of its backlog and order intake.
As of the end of the third quarter, Caterpillar’s backlog stood at approximately $28.1 billion, a decrease from the $30.7 billion backlog recorded in the second quarter. The backlog at the end of the first quarter was $30.4 billion, indicating a slight decline over the past few quarters.
During the third quarter, dealer inventories saw a $600 million increase, following a similar increase in the second quarter. Economic weakness can have an impact on dealer ordering behavior, leading to pressure on Caterpillar’s backlog. Consequently, both the backlog and inventories will be closely scrutinized when the company’s management addresses these matters during their upcoming conference call, scheduled for 8:30 a.m. Eastern time.
Analyst Mig Dobre expresses a lack of optimism regarding the forthcoming call and rates Caterpillar shares as Sell, with a $232 price target. According to FactSet data, approximately 42% of analysts covering Caterpillar stock rate it as a Buy, while the average Buy-rating ratio for stocks in the S&P 500 index is around 55%. Moreover, the average analyst price target for Caterpillar is approximately $288 per share.
In terms of its recent performance, Caterpillar’s stock has witnessed a 12% increase over the past year leading up to Tuesday’s trading session. On the other hand, the broader S&P 500 and Dow Jones Industrial Average have experienced gains of about 8% and 1% respectively.
