Even a Global Economic Disaster Not Enough to Stop Caterpillar (NYSE:CAT) Entirely

If the second quarter of 2020 was the economic catastrophe of investors' nightmares, then the third quarter was the economic recovery that soothed at least some troubled souls. We're hardly out of the woods, even now going into the fourth quarter, but the worst of things does seem to be past. That's about the best way to sum up Caterpillar (NYSE:CAT), who posted better-than-expected earnings, but still some issues that will dog the company going forward.

Better Than Expected, Though Not as Good as Hoped

It was a strange mix in the numbers for Caterpillar this quarter, as the heavy equipment manufacturer boasted revenue of $9.9 billion this quarter and adjusted earnings per share of $1.34. Since analysts expected $9.798 billion in revenue and adjusted earnings per share of $1.18, it's a win for Caterpillar, and a win is a win.

However, that win came towing plenty of bad news behind it. The $9.9 billion the company took in was actually a 23% drop over the numbers seen this time last year, and the profit per share figure was down a hefty 54% along with it. This comes after a second quarter that saw even worse losses, with profit down 70% over the same time last year.

The losses, Caterpillar noted, came from lower overall sales volume, as end-users needed less heavy equipment so far this year, and dealers weren't interested in keeping a lot of hardware in stock to meet that reduced demand.

A Possibly More Positive Future?

Not surprisingly, Caterpillar—as expressed by recent remarks from its CEO and Chairman Jim Umpleby—is trying to stay upbeat. There are “positive signs” coming from several places, Umpleby noted, and that's prompting Caterpillar to execute new strategies and respond to conditions on the ground accordingly.

The analysts, meanwhile, are reacting to this notion surprisingly positively. While the consensus rating on Caterpillar—based on our latest research—is sitting squarely at “hold”, it's been trending upward since six months ago. Back then, the company had six “sell” ratings to its credit, with seven “hold” and eight “buy.” Now, the company has polarized, with just two “sell” ratings, nine “hold” and 12 “buy”. While there was some caution a month ago—30 days ago, the company had 11 “hold” ratings and 11 “buy” ratings—that caution seems to have tapered off somewhat.

Moreover, the price target on the company has been trending upward steadily over that last six months. Back then, the company came in at $128.83. It's been moving upward ever since, up until today's target of $146.22. That's no small gain from a company with a three-figure share price as it is, though given current prices, it actually expresses some downside risk for the first time in six months. Interestingly, in the last month, four analysts—Credit Suisse, Wells Fargo, Deutsche Bank Aktiengesellschaft and Morgan Stanley—have all hiked price targets on the company, which is something of an expression of confidence.

Durable Goods are Durable

It's the one problem with a company like Caterpillar: there's really only so much repeat business that can be had. A bulldozer, a bucket loader, and items like these tend to last for years, if not decades. Sure, there will be some traffic coming as a result of product upgrades, but that bulldozer a county road crew bought a decade ago is probably still running just fine. Objectively, Caterpillar is doing shockingly well; you don't pull in almost $10 billion in sales and lament your hard luck, unless you needed to spend $12 billion to make those sales happen.

At any rate, the disaster that was the second quarter is finally starting to unwind, in some places much more so than others. We're seeing home construction crop up all over too—the housing market is still on fire in a lot of places—which generally calls for heavy equipment to prepare ground and bring in building supplies. A recovery ahead for Caterpillar may not be out of line, but given the current price of Caterpillar stock, there may be a little more shaking out to come. Hang on to your stock, certainly, but picking up a little more may not be the smartest move right now.