A Look into the Economy’s Future
Machinery industry leader, Caterpillar, is scheduled to announce its third-quarter earnings on Tuesday morning. The company’s performance will provide valuable insights into the state of the economy as we approach 2024.
According to FactSet, Wall Street analysts are expecting Caterpillar (ticker: CAT) to report earnings per share (EPS) of $4.80 from sales of $16.6 billion. Comparatively, during the third quarter of 2022, Caterpillar reported an EPS of $3.95 from sales of $15 billion.
The increase in sales can be attributed to higher prices and a rise in equipment shipments to customers. Furthermore, the recovery of end markets from pandemic-related lows, along with the resolution of supply chain issues that previously limited production and resulted in lower dealer inventories, has contributed to this growth.
Although the present situation seems positive, investors are keen on understanding what lies ahead.
Baird analyst Mig Dobre noted in an earnings preview report that investors were particularly focused on the potential margin improvement resulting from the normalization of supply chains and favorable price/cost trends during the first and second quarters of 2023. However, attention will now shift towards the progression of backlog and orders.
At the end of the second quarter, Caterpillar’s backlog stood at $30.7 billion, slightly higher than the $30.4 billion recorded in the first quarter and approximately $30 billion at the end of the third quarter in 2022. Additionally, management announced a $600 million increase in dealer inventories during the second quarter.
Consequently, when Caterpillar releases its results, investors will closely scrutinize both the backlog and inventories. Economic weaknesses can discourage dealers from placing orders, thereby putting pressure on the backlog. Management is scheduled to host a conference call at 8:30 a.m. Eastern time.
However, analyst Mig Dobre holds a pessimistic outlook for the upcoming update. He rates Caterpillar’s shares as Sell and has set a price target of $232 for Cat stock. On the other hand, FactSet reveals that 42% of analysts covering Cat stock rate the shares as Buy. The average Buy-rating ratio for stocks in the S&P 500 is approximately 55%. Additionally, the average analyst price target for Cat stock is around $288 per share.
Over the past year, Caterpillar stock has grown by approximately 12%. In comparison, the S&P 500 and Dow Jones Industrial Average have risen by roughly 8% and 1% respectively.
