Caterpillar (CAT, Financial) hit it out of the park in the third quarter, outperforming expectations on nearly every front. Investors who have been keeping an eye out for earnings results are taking note of Caterpillar's remarkable performance and bidding up its share price as a result. Indeed, Caterpillar is a force to be reckoned with in today's volatile business climate; as many stocks are still in decline, this one just marked its biggest monthly gain in 13 years.
The strong third-quarter performance led to one of the biggest rallies in the company's history. However, there is some concern that the upside is limited for the stock after its excellent October. Notably, UBS (UBS, Financial) analyst Steven Fisher downgraded Caterpillar and cut his price target on the company.
Undoubtedly, Caterpillar operates an excellent business. The company is known for its diverse range of offerings, which makes it an extremely appealing stock for investors. Caterpillar has investments in the metals, minerals and energy sectors, giving it a solid foothold in numerous industries. The post-pandemic surge in demand for construction equipment has also helped Caterpillar's robust recovery in recent years, with sales continuing to increase despite the slowdown in the U.S. economy.
While the diversity of Caterpillar's business may be seen as a cause for concern due to the potential effects of recessions and supply chain disruptions, the company has so far weathered these challenges successfully. Sales have continued to soar even as prices remain strong, indicating Caterpillar's resilience and ability to thrive under changing conditions. Ultimately, Caterpillar's success reflects its focus on diversity and its ability to adapt to shifting market trends.
While all that may be true, share prices are still volatile, and value investors might want to avoid this overheated stock for now in my opinion. No matter how you slice it, an overvalued stock in a recessionary environment is much too risky in my view.
Third-quarter earnings are giving Caterpillar bulls plenty of reasons to smile
In Caterpillar's third quarter, total sales and revenue outpaced estimates by a wide margin. Not only has revenue increased by 21% over last year, but Caterpillar also saw higher sales volume and higher prices across all product lines. This indicates that Caterpillar can adapt quickly to changing market conditions, helping ensure continued success in the years ahead. Inflation, one of the buzzwords coming into this earnings season, did not impact the company's earnings much. Machinery, energy and transportation revenues were all up by 22%. Construction industries, resource industries and energy transportation also jumped double digits.
The only downside in the earnings report was $461 million in currency-related effects. You can expect that with a company with international operations at Caterpillar's scale due to the stronger dollar.
A bigger issue is potential supply chain disruptions. Given the recent spread of new Covid-19 variants, Caterpillar faces serious challenges in meeting its supply chain needs. One prime concern is the potential disruption to the company's global network of suppliers and manufacturers. The threat of supply chain disruptions could have major consequences for Caterpillar, as it relies on these partners to provide critical parts and materials for its products.
In addition, Caterpillar is also grappling with the impact of slow growth in construction within the U.S. and Chinese markes.
Despite these challenges, Caterpillar remains committed to maintaining its position at the forefront of global business by continuing to innovate and deliver value for its customers worldwide.
Caterpillar might have become overheated after earnings
Caterpillar was one of the top-performing stocks in October, as investors have flocked to the industrial giant in light of its stellar growth prospects and robust earnings report.
However, according to UBS analyst Steven Fisher's report, the potential for Caterpillar shares to continue their upward momentum is now more balanced, given their strong recent performance. As such, he recommended that investors hold off on buying Caterpillar at this time. While this news may cause some concern among Caterpillar investors, I believe the company's stock will likely remain one of the top performers on Wall Street for the long-term. After all, with Caterpillar poised to dominate global construction equipment markets and set new records for profitability and revenue growth, there's little doubt that savvy investors will continue to see great value in this thriving industry leader.
However, the stock still appears to be overheated given the market environment. While Caterpillar continues to show strong growth in terms of margins and earnings, the company's valuation is now beginning to look a bit more stretched. Furthermore, as interest rates rise, Fisher believes Caterpillar could face additional headwinds. Nevertheless, Fisher remains optimistic about Caterpillar's long-term prospects and maintains a bullish outlook on the company's underlying business fundamentals.
Takeaway
Caterpillar has performed remarkably well in its most recent quarterly results. The company's strong fundamentals paint a very promising picture for investors. Caterpillar's diversified lines of businesses have also been instrumental in its success, helping to mitigate risk by reducing reliance on any one area. Additionally, Caterpillar's strong presence in the energy sector has benefited greatly from the post-pandemic boom in demand, contributing significantly to its impressive sales figures. And lastly, Caterpillar boasts superior profitability numbers compared to its industry peers, with net income margins, Ebit and return on total assets far outstripping those of the sector medians. Overall, Caterpillar remains a highly promising company.
However, for value investors, stretched valuations can be a real concern, especially in a bear market. Some observers worry that its price may be ahead of reality. Ultimately, only time will tell whether Caterpillar's current valuation is justified, but for those looking for value in an otherwise bearish market, Caterpillar will look expensive at current levels.
