Why Caterpillar Stock Is Crushing the Market This Week

What happened

There’s no stopping Caterpillar (CAT 2.66%) stock this week — shares of the Dow Jones Industrial Average component were up 13.7% through the week as of 9:45 a.m. ET Friday, according to data provided by S&P Global Market Intelligence. The Dow was up about 3% this week as of the time of this writing.

Caterpillar is considered an economic bellwether given its unparalleled foothold in the heavy equipment and mining industries. Strong earnings, therefore, can help allay fears about the economy to some extent.

This week, Caterpillar didn’t just report stellar numbers for its third quarter that handily beat Wall Street estimates, it also projected solid revenue growth and a “significantly” higher adjusted operating profit margin for its fourth quarter.

So what

Here are some key numbers from Caterpillar’s third-quarter earnings report (all changes are year over year):

  • Revenue: Up 21% to $15 billion.
  • Operating profit margin: 16.2% versus 13.4% in the year-ago quarter.
  • Earnings: Up 49% to $3.87 per share.

Caterpillar’s top-line growth was driven by higher sales volumes and prices, with each of its segments — resource industries (primarily mining), construction industries, and energy and transportation — clocking double-digit revenue growth. The company’s operating profit rocketed 46% higher year over year in the quarter, with resource industries reporting an 81% jump in profits on favorable pricing and higher sales volumes.

Now what

Amid fears of a recession, the markets are becoming wary about the potential demand for heavy equipment in the coming months. Caterpillar, however, sees no slowdown just yet.

In fact, it expects to generate its highest quarterly sales for the year in the fourth quarter, partly because of seasonality but also because it sees strong sequential and year-over-year sales growth in all three segments. That should drive Caterpillar’s margins even higher in the fourth quarter.

Caterpillar’s strong set of numbers and strong outlook seem to have convinced investors that this company has the mettle to ride out any future storms, and so they didn’t shy away from betting on the blue chip stock this week. That’s not a wrong expectation for a company that met its margin targets even in a year like 2020, when the pandemic hit its sales hard.

 

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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