Caterpillar (CAT), the Dow Jones earthmoving giant, is set to report second-quarter earnings before Tuesday’s open. The business update comes as CAT stock has rallied into a buy zone as a $1-trillion federal windfall supports manufacturing, mining and infrastructure projects.
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Still, CAT stock went through a valley despite crushing Q1 earnings estimates on April 27. Investors turned cautious after management said it expected dealer inventories to fall vs. Q1 levels. That implied a headwind to sales, as dealers fill a portion of demand by shrinking their own inventory levels. Caterpillar also noted that it expected less benefit going forward from inflating its own prices over its manufacturing costs.
CAT stock’s reaction to Q2 results also could hinge on the inventory outlook. In a July 11 note, Baird analyst Mircea Dobre wrote that a Caterpillar supplier had flagged a decline in orders, raising a question about Q4 production levels. Dobre thinks Caterpillar may be adjusting output to avoid further increasing dealer inventories. He has an underperform rating and 183 price target on CAT stock.
Caterpillar Earnings
Estimates: Analysts expect Caterpillar earnings per share of $4.57, up 44% vs. Q2 2022. Revenue is seen growing 15.7% to $16.49 billion, which would be the third straight quarter of slightly decelerating top-line gains.
Results: Check back on Tuesday morning.
CAT Stock
Early Friday, CAT stock rose 1.7% to 264.83. CAT stock is now slightly extended from a 250.89 buy point from a 23-week cup-with-handle base, according to a MarketSmith analysis. That buy zone runs through 263.43.
But shares are actionable as CAT tries to clear a shelf or alternate handle.
CAT stock makes up 4.8% of the price-weighted Dow Jones. That ranks No. 6 among the Dow Jones 30.
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United Rentals (URI), a heavy-equipment rental firm, climbed 3.3% to 460.72, flashing an early entry.
Shares plunged to the 10-week line Thursday morning following strong earnings, but slashed losses. URI stock rose slightly Friday, but came off highs. United Rentals stock has a 446.90 cup-with-handle buy point, but investors could use Friday’s intraday peak of 459.30 as an early entry.
Industrial Construction Boom
“The 75% (of CAT’s construction business) that is nonresidential is quite strong,” CEO Jim Umpleby said in a June 20 investor presentation arranged by BofA. “And we are quite bullish about what we see coming in.” He noted that CAT Financial also should help shield the company from the impact of any pullback among commercial banks.
Nonresidential strength, he said, is underpinned by the Inflation Reduction Act, the Chips Act and the 2021 infrastructure law.
Caterpillar has a hand in “the high-tension lines that have to be built, the wind turbines, the charging stations” to power the energy transition, Umpleby said. “If you go to one of those big battery plants or a big chip plant, you will see literally hundreds of pieces of construction equipment.”
Commerce Department data shows that spending on manufacturing construction hit $194 billion at an annual rate in May, up 76% from a year earlier. Over the same period, spending on highway and street construction has grown 14% to $125.3 billion.
Umpleby also noted “a lot of strength” in Caterpillar’s energy and transportation business. He highlighted generators for data centers, whose need is fueled by “everything moving to the cloud” and artificial intelligence.
Its resource industry business also is benefiting from an increase in mining activity that is a long-term story. “The average electric vehicle takes six times as many minerals as an internal combustion engine car.”
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