Do Caterpillar's Results Hint at a Looming Infrastructure Bubble?

Key Points

• Caterpillar stock is soaring after the company reported earnings that were 21% higher than estimates. 
• The company’s forecast, however, lends credence to market bears who believe that the company’s stimulus-driven growth is unsustainable. 
• CAT stock is serving as a proxy for what many investors are navigating in a tricky bull market.  

Caterpillar, Inc. NYSE: CAT stock is up nearly 8% in early trading after the company blew past revenue and earnings expectations. The question will be whether the report will be enough to move analyst sentiment which, while generally positive, suggests that these results are priced into the stock.  

The headline numbers for the company’s earnings report were very strong. Caterpillar posted earnings per share of $5.55 on revenue of $17.30 billion.  

Of particular note was the $5.55 EPS which was more than 21% higher than the consensus estimate of $4.57. Even at a time when earnings are being revised lower, a beat of more than 20% is something that shouldn’t be dismissed too quickly.  

At the same time, the company guided for earnings in the third quarter that would be higher on a year-over-year basis, but lower than the $5.55 it generated this quarter. Some analysts remark that this is justified due to rising dealer inventories and a declining backlog of orders.  

A Proxy for a Tricky Bull Market 

Caterpillar may be a proxy for what many investors are feeling about this market rally. The company’s revenue and earnings growth is being fueled, in large part, by infrastructure spending.  

On one hand, Caterpillar has several catalysts that may give the company’s revenue and earnings a long runway. Many companies are moving quickly to onshore manufacturing. There is still a need for our nation’s infrastructure to be repaired. Mining operations around the world picking up steam due to the need for lithium, copper and rare earth metals. All of these projects will require the heavy equipment that Caterpillar provides.  

On the other hand, you can look at the historic Infrastructure Act as stimulus and therefore unsustainable (i.e., not organic) revenue. If you’re in that camp, there is evidence in the report to confirm that view. 

CAT Stock is a Hold but Maybe More 

If you’ve been avoiding CAT stock, you’ve missed out on a 42% gain in the last year, a 15% gain in 2023 alone and a 27% gain in the three months ending July 31.  

And that doesn’t include a solid, if not spectacular dividend. The yield is only 1.84%. But the annual payout is $5.20 per share. And Caterpillar is a dividend aristocrat that has increased its dividend in each of the last 31 consecutive years. 

The takeaway is this. The stock market is not the economy, yet many investors have left profits on the table because of preconceived notions about what the market should be doing. 

 Still, CAT stock is at the top of its 52-week range. Analysts estimates suggest a pullback of 15% from the stock’s current levels. Yet profits are expected to grow by about 4% and the company’s forward P/E ratio is 14x.  

A key for investors looking to take a new position in, or add to their existing position, will be to watch analyst sentiment. So far, analysts like the stock, but have the current growth fully priced in. If there are no higher price targets, there won’t be much juice to send the stock higher.