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Can Caterpillar Claw Higher in a Falling Market?

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Demand in China continues to slow, but US Infrastructure Act could help cushion the effects

Heavy Machinery Construction and Manufacturer Caterpillar (NYSE: CAT) stocks survived the bear market this year (-17%). Despite declining demand in China, supply chain malfunctions, inflationary pressureand the slowdown in the housing market, the company is still optimistic about strength in the second half of the year. Order backlog rose by $2 billion in the second quarter of 2022. As the world’s largest construction equipment manufacturer, the company is often used as a key indicator of the economy, as more construction spending implies growth, while spending contraction indicates a weakening economy. Rising interest rates can dampen construction activity, especially in the housing marketthat Caterpillar and colleagues like Deere & Company (NYSE: DE)and Terex Corporation (NYSE: TEX)) need growth. Like a cyclical business, Caterpillar has peaks and troughs that coincide with economic expansion and contraction. However, the US Infrastructure and Jobs Act may allow Caterpillar to have a longer runway even in a recession as the projects are expected to increase by the end of 2022 to 2023. Second quarter earnings reflected contraction in the commercial sector as new retail business declined (-12%) or $429 million. The sales loss in the second quarter was due to continued supply chain constraints (such as the semiconductor shortage) as demand remained healthy in most end markets. The company expected both volume and price realization to improve in the second half of the year. Caterpillar remains optimistic and expects a recovery in the second half, with any shortfalls being attributed to component shortages due to supply chain disruption.

Signs of Delay

On August 2, 2022, Caterpillar released its second quarter 2022 results for the quarter ended June 2022. The company reported earnings per share (EPS) of $3.18, better than analyst estimates for earnings of $3. .02, with $0.16. Revenues were up 10.5% year-over-year (year-on-year) to $14.25 billion, excluding analyst estimates of $14.39 billion. Cat Financial grew 3% to $668 million. The revenue increase was driven by a $20 million positive effect from higher financing rates and a $18 million positive effect from equipment returns and take-backs, offset by a $15 million negative effect from lower average earning assets. New retail volume decreased (-12%) or $429 million to $3.1 billion.

Can Caterpillar Claw Higher in a Falling Market?

This is what the charts say

Using the gun cards on the weekly and daily time frames provides an accurate picture of the landscape for CAT stock. The weekly gun chart twirled from the swing low near $167.57 Fibonacci (fib) level before peaking at $200.37 and its inverse pup breakdown began as the 5-period weekly moving average (MA) resistance falls to $82.63, followed by the 15-period MA at $185.12. The 50-period weekly MA resistance is at $201.51 and the 200-period weekly MA resistance is at $168.28. Shares sparked a stochastic mini-inverse pup breakdown after rejecting the $182.80 weekly market structure layer (MSL) buy tractor. The weekly stochastic mini inverse pup targets the weekly lower Bollinger Bands (BBs) at $154.40. The daily gun chart breakdown has a declining 5-period MA resistance at $176.59, followed by the 15-period MA at $181.62. The daily lower BBs are at $166.81. Attractive pullback levels are $167.57 fib, $164.96, $160.83, $157.65, $154.64 fib, $152.50, $150.55 fib and $147.55.

Supply Chain is the problem, not the question

Jim Umpleby, CEO of Caterpillar, commented: “As we close the first half of 2022, I would like to thank our global team for delivering another great quarter with double-digit revenue and adjusted adjusted sales growth. earnings per share despite ongoing supply chain challenges Our second quarter results reflect healthy demand in most of our end markets.” Supply chain constraints were attributed to the lack of analysts’ revenue estimates, for example, motor control modules are one of the key components impacted by the semiconductor shortage, CEO Impleby reiterated that demand for its products and services in the end markets has been strong , with remarkably strong momentum in services. He remains confident that services revenue could double to $28 billion by 2026. Production costs continued to rise, but were offset by price realization. Dealer inventory remains low. Backlog grew in the quarter by nearly $2 billion, North American sales were up 18% and Latin America saw sales growth of 27%. EAME saw a (-3%) sales decline due to: currency effects. Sales to users were down (-3%) and machines were down (-4%). These were due to component shortages in the supply chain. Sales to construction users fell (-4%) due to supply chain constraints and weakness in China. Operating profit margins decreased from 13.9% in the same period last year to 13.6%.

Industry expectations

Caterpillar expects non-residential construction to remain strong due to construction backlogs. The US Infrastructure and Jobs Act is expected to lead to an increase in projects. Housing construction is declining from very strong levels in 2021. The EU has proposed an infrastructure plan, but activity is slowing down. Latin America continues to show strong growth thanks to supportive raw material prices. In construction, healthy demand is expected until the end of the year. In Resources, mining companies remain disciplined and expect continued high equipment utilization. Continued growth expected in heavy structures, quarries and aggregates. Energy and transportation is showing improving momentum, with solar services expected to remain stable. Oil and gas drove new equipment orders in the first half and growth is expected to continue through 2023.

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