Caterpillar (CAT) is trading sharply higher (+7%) this morning after reporting Q1 earnings above market expectations. It's the first time the stock has traded above $100 since late 2014. You're probably familiar with Caterpillar, but maybe not aware of everything they do, so let's provide some quick background.
CAT is a major manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment.
As you can imagine, CAT's results are materially affected by economic conditions globally and regionally. Demand for its products tends to be cyclical and can be significantly reduced in periods of economic weakness and lower levels of government and business investment. The energy, transportation and mining industries are major users of CAT's products, including the coal, iron ore, gold, copper, oil and natural gas industries. Customers in these industries frequently base their decisions to purchase on the expected future performance of these industries, which in turn are dependent in part on commodity prices.
Turning to the Q1 results, non-GAAP EPS exactly doubled YoY to $1.28, while revenue rose 3.8% year/year to $9.82 bln. Both results were better than market expectations. In terms of FY17 guidance, CAT sees EPS of approximately $3.75 and revenue of $38-41 bln. These estimates are well above prior guidance of $2.90 and $36-39 bln, respectively.
CAT says there are encouraging signs, with promising quoting activity in many of its markets and retail sales to users turning positive for both machines and Energy & Transportation for the first time in several years. In fact, for the first time in more than two years, same quarter sales and revenues increased.
Overall, CAT says it's seeing signs of recovery in several of the industries it serves. However, geopolitical and market uncertainty along with volatility in commodity prices continue to present risks for the rest of the year. CAT is also benefiting from its significant cost reduction and restructuring actions. Manufacturing facility consolidations are a big part of its restructuring efforts. These actions have improved cash flow and further strengthened its balance sheet.
In sum, this was a good quarter for Caterpillar. Investors are bidding the stock higher on the solid Q1 beat and the increase in 2017 guidance. Overall, the stock chart looks pretty positive. The stock gapped up in early November, then it has basically traded sideways (also known as consolidating) since then. When a stock consolidates a gap higher for several months as is the case here, then moves sharply higher as it is today to a new 52-week high, that often means that another leg higher is possible.
However, keep in mind, CAT is pretty cyclical so a downturn in the economy will send the stock lower. The stock has a history of being up and down. However, CAT seems pretty positive on the balance of 2017.