Can Caterpillar climb higher in a falling market?

Chinese demand continues to slow, but US infrastructure law can help mitigate the effects

The stock of construction and heavy machinery maker Caterpillar (NYSE: CAT) resisted the bear market (-17%) during the year. Despite slowing demand in China, supply chain disruptions, inflationary pressures and a slowing housing market, the company is still optimistic in the second half of the year. Backlog increased by $2 billion in the second quarter of 2022. As the world’s largest maker of construction machinery, the company is often used as a key indicator of the economy as increased construction spending implies growth while shrinking spending signals a weakening economy. Rising interest rates may dampen construction activity, particularly in the residential construction market, which Caterpillar and peers like Deere & Company (NYSE: DE) and Terex Corporation (NYSE: TEX) need to maintain their growth. As a cyclical business, Caterpillar experiences ups and downs that coincide with economic expansion and contraction. However, the U.S. Infrastructure and Jobs Act could allow Caterpillar to have a longer runway, even in a recession, as projects are expected to ramp up from late 2022 through 2023. Its earnings from the second quarter reflected the contraction in the commercial sector as new retail activity suffered a (-12%) or decline of $429 million. The revenue loss in the second quarter was blamed on continued supply chain constraints (such as shortages of semiconductors) as demand remained healthy in most end markets. The Company expected volume and price realization to improve in the second half of the year. Caterpillar remains optimistic and expects a recovery in the second half, attributing any shortfall to component shortages resulting from supply chain disruption.

Signs of slowing down

On August 2, 2022, Caterpillar released its fiscal second quarter 2022 results for the quarter ending June 2022. The company reported earnings per share (EPS) of $3.18, beating analyst estimates for a profit of $3.02, $0.16. Revenue rose 10.5% year-over-year (YoY) to $14.25 billion, missing analyst estimates for $14.39 billion. Cat Financial increased revenue 3% to $668 million. The increase in revenue was due to the favorable impact of $20 million from higher financing rates and the favorable impact of $18 million from returned and traded-in equipment, offset by the negative impact of $15 million from dollars from the decline in average earning assets. Retail new business volume decreased by (-12%) or $429 million to $3.1 billion.

Can Caterpillar climb higher in a falling market?

Here’s what the charts say

Using the rifle charts on the weekly and daily timeframes provides an accurate view of the landscape for the CAT stock. The weekly Rifles chart has wrapped around the swing low near $167.57 Fibonacci level (fib) before peaking at $200.37 and beginning its reverse puppy breakdown as the weekly 5-period moving average (MA) resistance falls to $82.63, followed by the 15-period MA at $185.12 . The weekly 50-period MA resistance is at $201.51 and the weekly 200-period MA at $168.28. Stocks triggered a mini stochastic reverse PUP breakdown after rejecting the weekly $182.80 weak market structure (MSL) purchase trigger. The weekly Stochastic Reverse Mini PUP targets the lower weekly Bollinger Bands (BB) at $154.40. The daily breakdown of the Rifles chart has a resistance 5-period MA down at $176.59, followed by the 15-period MA at $181.62. The daily BB bottoms sit at $166.81. Attractive pullback levels lie at $167.57 fib, $164.96, $160.83, $157.65, $154.64 fib, $152.50, $150.55 fib and $147.55 .

The supply chain is the problem, not the demand

Caterpillar CEO Jim Umpleby said, “As we close out the first half of 2022, I want to thank our global team for delivering another strong quarter with double-digit revenue and profit growth per action adjusted despite current supply chain challenges. Our second quarter results reflect healthy demand in most of our end markets. Supply chain constraints have been blamed for missing high-level analyst estimates. For example, engine control modules are one of the most important components affected due to the shortage of semiconductors. CEO Impleby reiterated that demand was strong in end markets for its products and services, with strong momentum in services in particular. He remains confident that service revenues can double to $28 billion by 2026. Manufacturing costs have continued to rise, but have been offset by price realization. Dealer inventory remains at the low end. Backlog increased by nearly $2 billion during the quarter. Sales in North America increased by 18% and Latin America recorded sales growth of 27%. The EAME region recorded a decrease in sales (-3%) due to currency effects. Sales to users fell (-3%) and machines fell (-4%). These were due to component shortages from the supply chain. Sales to users in construction industries fell (-4%) due to supply chain constraints and weakness in China. Operating profit margins fell to 13.6% from 13.9% a year ago.

Expectations by industry

Caterpillar expects continued strength in non-residential construction due to construction backlogs. The US Infrastructure and Jobs Act is expected to see a surge in projects. Residential construction is slowing from very high levels in 2021. The EU has proposed an infrastructure plan, but business activity is slowing. Latin America continues to show strong growth thanks to the support of commodity prices. Vigorous demand is expected until the end of the year in construction. In resources, mining companies remain disciplined and expect continued high equipment utilization. Continued expected growth in heavy construction, quarries and aggregates. Energy and transportation show improved momentum, with solar services expected to remain stable. Oil & Gas drove new equipment orders in the first half and expects growth to continue through 2023.