Caterpillar’s market reset continues: expect further price drops

The market reaction to By Caterpillar NYSE:CAT The first quarter results and guidance demonstrate that the price action correction is not over. The news is not bad, but lukewarm and weaker than expected, causing a reset in sentiment. Analysts rate the stock at Hold and have steadily raised their price targets over the past year, but the market has gotten ahead of the trend, setting the stock up for today’s decline. Since Caterpillar stock is still 10% above the analyst consensus reported by Marketbeat, it will likely fall at least another 10%, retesting support at the 150-day EMA, if not lower price points.

However, Caterpillar is still a solid dividend-paying stock. At lower prices, it will offer better value, leaning towards deep value, and pay a higher yield. The dividend is worth about 1.5%, with the shares trading around $360, so the increase won’t be substantial, but investors need every edge they can get. Payment is reliable and distribution is growing, so there is some leverage to be gained as well. The payout ratio is a low 24% and the balance sheet is healthy, so further increases are expected to match the 8% CAGR now recorded.

Caterpillar’s global presence and diversification drive results

Caterpillar had a tough first quarter, with demand offsetting price increases, leaving revenue at $15.8 billion and down 0.6% from last year. Revenues are relatively stable compared to last year, but $120 million below the consensus of analysts, who expect slight growth. Energy and Transportation was the strongest segment, with a 7% increase offset by a 7% decline in the resources sectors and a 5% decline in the construction sectors. Geographically, North America led with 7% growth, followed by a 2% increase in Latin America, offset by a 5% contraction in Asia and 17% in Europe.

The margin is the positive aspect of the report, but there is an isolated fact at play and the news was not enough to sustain the upward momentum in the share price. GAAP operating margin increased 510 basis points to 22.3% to generate record earnings. GAAP and adjusted earnings include a disposal of assets, but the force is also present when accounting for the sale. Adjusted earnings rose 14% on leverage gained through pricing and efficiency efforts to $5.60, 47 cents above consensus. Taking the sale into account, adjusted earnings rose 7% and 13 cents above forecasts.

Driving is another critical point in today’s market. Guidance expects the second quarter to see a contraction and stable results for the full year. However, the bottom line is that the second quarter will represent the bottom of the contraction, leading to growth in the second half that is expected to accelerate next year.

Caterpillar is creating leverage for investors

Caterpillar’s results and guidance are tepid but sufficient to support the company’s health and a prospect of robust capital returns. The dividend yield is not robust in itself; at 1.5%, it’s only slightly better than the S&P 500 average, but stock buybacks make it worse. The company aggressively bought back shares and lowered its count by an average of 4.3% at the end of the first quarter. Repurchases are expected to remain robust into 2024 and may grow over time.

$339.69

-23.83 (-6.56%)

(At 1:15 p.m. ET)

52 week interval

$204.04

▼

$382.01

Dividend yield

1.53%

P/E ratio

16.87

Price target

$307.56

CAT stock price action is unfavorable, but the uptrend remains intact. The caveat for investors is that the uptrend has taken price action significantly above fair value, and the correction could easily do the opposite. Critical support targets exist at $318, $287, and $243. The first two targets are within the analysis consensus and are likely to provide solid support. Otherwise, a move to $243 is likely.

The next catalyst for the CAT is the FOMC rate cut. The FOMC rate cut is expected to signal an economic turnaround that will unleash global industrial activity. The problem today is that inflation and persistently warm jobs data suggest the FOMC won’t cut rates until the end of this year, if they do so in 2024.

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