With 135 S&P 500 companies reporting first-quarter 2018 results, many investors were expecting a dicey trading session. The market lived up to expectations.
All the leading U.S. stock indexes were down on Tuesday after the benchmark U.S. Treasury bond yield hit 3% for the first time since January 2014. According to analysts, this prompted some investors to switch from equities to fixed income, resulting in a selloff.
In addition, several stocks ended the day lower, despite posting impressive first-quarter results.
Among the biggest surprises of the day was American construction and industrial equipment manufacturer Caterpillar Inc. (CAT, Financial), which crushed analyst estimates on both revenue and earnings. Shares initially surged 4% in pre-market trading before falling.
For the most recent quarter, the company posted adjusted earnings of $2.82 per share, topping the consensus estimate of $2.12. Revenue increased 31% year over year to $12.9 billion, beating estimates of $11.93 billion.
This keeps the company well on course to post revenue of more than $50 billion for the year. Analysts expect the company to earn $51 billion.
The company also raised its guidance for 2018, citing positive global economic growth as a major catalyst. Caterpillar now expects earnings of $9.75 to $10.75 per share for the year, compared to the previous outlook of $7.75 to $8.75 per share. Adjusted earnings are expected to range from $10.75 to $11.75, up from the previous estimates of $8.25 to $9.25 per share.
Despite delivering strong results, the company's stock price tumbled nearly 10% from its pre-market trading high of about $160 per share to close at $144 per share.
Caterpillar ended the day about 6% lower from Monday’s closing price, but this could be a temporary pullback, just waiting for the clouded market sentiment to clear before rebounding in response to what was an impressive quarter for the company.
Some analysts attributed the plunge to management’s precautionary comment regarding material costs, which Caterpillar now expects to be above estimates. Looking at the way stocks fell across the board, however, it could be more about the benchmark bond yields hitting 3% than the fear of what higher material costs could do to the company’s margins.
Currently, Caterpillar trades at an impressive price-earnings ratio of about 27.60 times. Shares rallied about 180% between January 2016 and January 2018. This suggests it has been doing well over the past couple of years.Ă‚
Caterpillar could benefit substantially from its business in Asia, especially China, whose construction industry growth is tipped to create insatiable demand for heavy machinery equipment.
The economies of most Latin America countries are expected to continue benefiting from rising oil prices, which will also create demand for construction equipment. North America continues to be Caterpillar’s leading revenue generator. Given its steady economic growth and a business environment that has become more conducive during the Trump administration, the company's near-term future looks even brighter.
Disclosure: I have no positions in the stocks mentioned in this article.
