Can Caterpillars Claw High in a Falling Market?

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China’s demand remains slow but US Infrastructure Act could help mitigate impact


Construction and heavy machinery maker Caterpillar (NYSE:CAT) stock is weathering a bear market decline (-17%) on the year. Despite sluggish demand in China, supply chain disruptions, inflationary pressures and a slowdown in the housing market, the company remained strong in the second half of the year. The order backlog increased by $2 billion in the second quarter of 2022. As the world’s largest manufacturer of construction machinery, the company is often used as a leading indicator for the economy as more construction spending increases while a contraction in spending indicates a weak economy. Rising interest rates could dampen construction activity, especially in the home construction market, which Caterpillar and peers such as Deere & Company (NYSE:DE) and Terex Corporation (NYSE:TEX) need to keep growth. As a cyclical company, Caterpillar has peaks and valleys that coincide with economic expansion and contraction. However, the US Infrastructure and Jobs Act could enable Caterpillar to last longer even in a recession as projects are expected to grow from late 2022 to 2023. This second quarter earnings reflect contraction in the commercial sector as new retail business suffered a loss (-12%) or a decline of $429 million. The revenue shortfall in the second quarter was blamed on continued supply chain constraints (such as semiconductor shortages) as demand remained healthy in most end markets. The company expects both volumes and prices to improve in the second half of the year. Caterpillar is hoping for a second-half recovery to blame any shortage on component shortages stemming from the supply chain disruption.

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bearish signals

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On August 2, 2022, Caterpillar released its fiscal second quarter 2022 results for the quarter ended June 2022. The company reported earnings-per-share (EPS) profit of $3.18, which is $0.16 for a profit of $3.02. Revenue rose 10.5% year-over-year (YoY) to $14.25 billion, missing analyst estimates of $14.39 billion. Cat Financial’s revenue rose 3% to $668 million. Revenue growth was due to a $20 million favorable impact from higher financing rates and a $18 million favorable impact from returned and repossessed equipment, which was offset by $15 million in negative impact from lower average earning assets. New retail business volume fell (-12%), or $429 million, to $3.1 billion.

Can Caterpillars Claw High in a Falling Market?

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Here’s what the charts say

Using Rifle charts on the weekly and daily time frames provides an accurate view of the scenario for the Cat stock. The weekly Rifle chart closed from a swing low near the $167.57 Fibonacci (Fibonacci) level and acted as a 15-period MA before peaking at $200.37 and falling below the weekly 5-period moving average (MA) resistance at $82.63. In contrast the puppy breakdown began. $185.12. The weekly 50-period MA is with resistance at $201.51 and the weekly 200-period MA at $168.28. Shares initiated a stochastic mini reversal puppy breakdown after rejecting the $182.80 weekly market structure low (MSL) buy trigger. Weekly Stochastic Mini Reversal Puppy is targeting the weekly lower Bollinger Bands (BB) at $154.40. In the daily Rifle chart breakdown, there is a 5-period MA with resistance at $176.59, followed by a 15-period MA at $181.62. The daily low BB sits at $166.81. Attractive pullback levels sit at $167.57 Fib, $164.96, $160.83, $157.65, $154.64 Fib, $152.50, $150.55 Fib, and $147.55 levels.

Supply chain is the problem, not the demand

Caterpillar CEO Jim Umpleby commented, “As we close out the first half of 2022, I want to thank our global team for delivering another good quarter with a double-digit top line and supply chain challenges.” Despite adjusted profit per share growth. Our second quarter results reflect healthy demand in most of our end markets.” Supply chain constraints were blamed for missing top line analyst estimates. For example, the engine control module Semiconductor shortages are one of the most important factors to be affected. CEO Impleby reiterated that demand was strong in end markets for its products and services, with a particularly strong momentum in services. He is confident that by 2026, services will continue to grow. Revenue may double to $28 billion. Manufacturing costs continued to rise but were offset by price realization. Dealer inventory remains low. Backlog in the quarter increased by nearly $2 billion. North American sales 18% and saw a 27% increase in sales in Latin America. EAME saw a decrease in (-3%) sales due to currency effects. Sales to users declined (-3%) and machines declined (-4%). These were due to a shortage of components originating from the supply chain. Sales to users in the construction industries declined (-4%) due to supply chain restrictions and weakness in China. Operating profit margin fell to 13.6% from 13.9% in the year-ago period.

industry expectations

Caterpillar expects continued non-residential construction strength due to the construction backlog. The US Infrastructure and Jobs Act is expected to accelerate projects. Residential construction is falling from very strong levels in 2021. The EU has proposed an infrastructure plan, but business activity is slowing. Supporting commodity prices continued strong growth in Latin America. The construction is expected to see good demand by the end of the year. In resources, mining companies remain disciplined and expect a continuation of high equipment usage. Continued growth is expected in heavy construction, quarrying and aggregates. Energy and transportation are improving, with solar services expected to remain stable. Oil and Gas placed new equipment orders in the first half and growth is expected to continue through 2023.



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