Caterpillar Being Weighed Down by Negative Investor Sentiment

Key Points

• Caterpillar stock is fighting to move higher despite posting strong quarterly earnings. 
• Investors are weighing the strong report against a backdrop of what is expected to be weaker growth for the remainder of the year.  
• CAT stock may still be a long-term buy for your portfolio, but growth-oriented investors will want to wait for a better price.  

At one time, the statement “as General Motors goes so goes the economy” carried weight with investors. Today, an inverse of that statement reflects the current state of Caterpillar, Inc. NYSE: CAT stock. That is, as the economy goes, so goes CAT stock. Let me explain. 

Despite posting what was objectively a strong earnings report, CAT stock dipped sharply immediately after the report. Although the stock did recover some to end the week, it still closed the week with a small loss.  

The issue seems to be investor sentiment. The report comes the same week that first quarter GDP shows an economy that is contracting quickly. There’s also growing evidence that credit conditions are deteriorating for businesses as well as consumers. And the Federal Reserve likely to increase the federal funds rate by 25 basis points when it meets in May. 

All of these data points are causing many investors to believe that the economy will continue to slow down for the rest of the year. And that could mean that there will be less capital expenditure (CapEx) spending on construction and other development projects.  

What Did Earnings Say? 

Caterpillar delivered what would usually be considered a stellar earnings report on April 27. The industrial giant beat on both the top and bottom lines. Earnings per share (EPS) came in $4.91 which was 29% higher than analysts’ expectations. Revenue was up 3.8% over expectations at $15.86 billion.  

And when you look at the earnings report on a year-over-year basis, the numbers are even more impressive. The $4.91 EPS was 70% higher than the $2.88 EPS posted in the same quarter in 2022. Revenue was 16% higher.  

The news was also bullish when investors look at metrics like profit margin which was up about 3.5% from the prior year quarter. And the company returned over $1 billion to shareholders by way of dividends and share buybacks.  

Is Growth Slowing? 

So that’s the good news. The not-so-good news is that the report also included some news that gave fodder for the bears. Specifically, dealer inventories were up. This is becoming a common theme with industrial companies. It suggests that demand may be weakening. That was reinforced by Caterpillar’s own projections that its backlog of future business was not easing.  

This is also reflected in the CAT stock price. In the past year, Caterpillar has outperformed the broader market. But in 2023, that story has reversed in a big way. While the S&P 500 index is up 8.5%, CAT stock is down 8.6%. And according to MarketBeat, Caterpillar analyst ratings show that one analyst, UBS Group, lowered its price target for the stock since the report. 

CAT Stock is Still a Long-Term Buy 

As of this writing, Caterpillar stock is trading in the middle of its 52-week range. It has a P/E ratio of around 16x which compares favorably with the mean average of the S&P 500. The stock also pays a healthy dividend of $4.80 per share annually with a yield of 2.19%. The company is also a dividend aristocrat having increased its dividend for 30 consecutive years. Revenue and earnings are also forecast to show single digit growth over the next five years.  

All of that suggests CAT stock is worth a buy if you’re looking for relative safety. But if you’re looking for short-term growth, there may be better options. Caterpillar short interest is down in the last month but remains elevated from 2022 levels. And there’s nothing in the report that is likely to tame the bears’ appetite.