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Market Insights

The very hungry Caterpillar keeps growing

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The revenge of the old economy was in full swing last week. Commodities, materials and industrial stocks have been outperforming of late. The latest rally was further spurred by rumours of China ending Covid Zero policy, and the aversion to tech stocks in a rising rate environment. Caterpillar is our pick for stock of the week.

Let’s start with the technicals:


After bottoming out in the 160 zone, Caterpillar shares rallied. First overcoming the 20 day moving average (DMA), retesting it from above and then pushing higher once again. A brief pause at the 200DMA was followed with a gap high open and a positive close to the week. Caterpillar stock is now up 10.2% YTD, no mean feat when the broader stock indices are in the red by 20% or more…

What’s greasing the wheels for this outperformance?

A big earnings beat was likely a factor. Revenues increased to $15 billion in the quarter, beating Refinitiv forecasts of $14.3 billion, and net income jumped to $2.04 billion, well above the analysts estimates of $1.68 billion.

Looking ahead, CEO Jim Umpleby expects the strong performance to continue:

“We expect adjusted operating profit margins to be significantly higher in the fourth quarter versus the prior year and slightly higher than in the third quarter. However, we now anticipate that our full-year margins will be at the low end or slightly below the low end of the Investor Day target range.”

Caterpillar is the world's largest construction and mining equipment manufacturer. Global demand is a huge factor in their business model and outlook..

Chief Financial Officer Andrew Bonfield acknowledged the current uncertainty but says that it’s not showing up in the numbers…

“While there is continued uncertainty regarding the macroeconomic backdrop, demand indicators remain supportive as sales to users increased by 7%. Backlog grew by $1.6 billion to $30 billion and dealer inventory remains at the low end of the typical range.”

Caterpillar was recently awarded a $1.2 billion US Department of Defense contract to supply construction equipment, and government infrastructure projects may be a factor in future too.

Last month, Russell Napier predicted that “we will see a boom in capital investment and a reindustrialisation of Western economies”. In his view, governments are likely to increase spending on energy, climate change and defence. Napier thinks “we’ll need at least 15 years of government-directed investment and financial repression”.

In many ways, this is a similar strategy to the one that China has deployed over the past few decades. Chinese spending has often focused on GDP growth via infrastructure spend, and the CCP is expected to continue this strategy, albeit at a slightly slower pace than previous years.

China’s property market has also been a significant source of demand for construction equipment. With Caterpillar’s presence across the construction, resource mining, and energy/transportation sectors, they are likely well placed to benefit if an industrial capex boom materialises.

However, a marked slowdown in global economic growth combined with governments turning off the fiscal taps to ‘balance the books’ could have the opposite impact. For now at least, Caterpillar revenues and profits are heading in the right direction.

Not investment advice. Past performance does not guarantee or predict future performance.

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