Investors and traders were determined to sell Caterpillar (CAT) shares after the stock gained 70% in 2017. That determination overshadowed yesterday’s good news on fourth quarter earnings and positive guidance for 2018. The shares, which I added to my Jubak Picks Portfolio yesterday, January 25, closed down 1.36% today, January 26.
For the quarter Caterpillar reported earnings of $2.16 a share (excluding one-time items.) That was 38 cents a share better than Wall Street analysts had projected. Revenue climbed 34.7% year over year to $12.9 billion for the period. Analysts had expected $12.01 billion in revenue.
For 2018 Caterpillar told Wall Street to expect earnings of $8.25 to $9.25 a share (excluding one-time items.) That’s significantly above Wall Street projections for $8.29 a share in earnings for 2018.
I suppose that if you really wanted to justify a sell, you could point to a drop in margins from the third quarter. It can be a warning sign for a cyclical company–which Caterpillar certainly is–when margins start to fall, even on rising revenue, because it can be a signal that a company is cutting prices or adding sales incentives in order to keep sales going when demand has started to falter. But I don’t see any of the other warning signs that would confirm this as a real danger. Caterpillar said that sales improved 46% in North America due to higher end-user demand. Dealer inventories decreased in the fourth quarter of 2016 and were essentially flat in the fourth quarter of 2017. The company characterized the start of 2018 as strong with good sales momentum, strong order rates, lean dealer inventories, and an increasing backlog of orders. And Caterpillar projects improved confidence and sales in some of the sectors that lagged in 2017 such as mining and energy where improving commodity prices look to increase sales. Operating margins will improve in 2018 from 2017 across all three of Caterpillar’s business segments, the company projects.
For 2018 Caterpillar also noted that it would pay a lower corporate tax rate (20% versus the 25% to 30% the company has paid over the last five years) and that a weaker dollar would help sales in overseas markets.
I think today’s reaction has been a “sell on the news” reflex. It might last for a few days, but I don’t see anything here to make me reconsider adding the shares to my 12-18 month Jubak Picks Portfolio.