Caterpillar Inc. (NYSE: CAT) unveiled its much-anticipated third-quarter earnings report on Tuesday, and the initial results were nothing short of remarkable. In an environment marked by increased government infrastructure investments, Caterpillar showcased its prowess, exceeding expectations.
With a resounding 12% surge in revenue to an impressive $16.8 billion, Caterpillar surpassed even the most optimistic forecasts of $16.52 billion. The highlight of the report, though, was the astonishing 40% spike in adjusted profit per share, soaring to $5.52.
Yet, despite this resounding success, the market reacted with a perplexing 6% drop in the company’s shares. The mystery of this decline unravelled as investors dug deeper into the details. A closer look revealed a concerning trend of slowing revenue growth across Caterpillar’s diverse operating segments. This slowdown, coupled with a dwindling order backlog and a less-than-stellar fourth-quarter outlook, cast a shadow on the jubilant mood.
The construction sales saw a robust 12% year-over-year increase but slipped by 2.2% from the prior quarter, raising eyebrows. Similarly, the resource industry segment boasted a healthy 9% rise compared to last year’s quarter, but that achievement was overshadowed by a 6% decline from the previous quarter. Even the energy and transportation segment’s impressive 11% year-over-year advance was eclipsed by a 5% quarter-on-quarter drop.
Perhaps the most telling sign of the uncertainty ahead was the $1.9 billion reduction in the order backlog. This marked the first decline since 2020, leading investors to wonder if it could foretell lower demand in the coming quarters. In the wake of Tuesday’s share price dip, the question lingers: Can Caterpillar reclaim its former glory?
Technical
On the 1D chart, the share price was trading in a descending channel before the recent run of selling pressure resulted in a steeper downtrend. The 100-SMA (orange line) has crossed the 25-SMA (green line) to the upside and is nearing convergence with the 50-SMA (blue line), suggesting a shift in the longer-term momentum.
The gap down on Tuesday could potentially be seen as a runaway gap at the bottom of the trend, and with the pre-market price action trending down, the pressure could be sustained on the market open. Support at $211.85 could come into play in the Wednesday session before lower support at $213.17 could come into the spotlight. If the price continues to move lower, neckline support at $204.35 could provide some buyers to prevent additional downside in the sessions to come.
However, should support be found at $221.85, the market could retrace the drastic selloff to potentially close the gap. Resistance at $231.64 could be the first hurdle for the bulls to cross before the 61.8% Fibonacci retracement from the prior uptrend could undergo a retest at $239.29, where the gap down was initiated.
Summary
Despite beating consensus on its top and bottom line in its latest earnings report, a weak outlook for the upcoming quarter triggered a 6% reduction in Caterpillar’s share price. The pre-market movement suggests that the momentum from Tuesday could continue, with support at $221.85 acting as a key level of interest to the direction of the price action as we advance.
Sources: Koyfin, Tradingview, Reuters, Caterpillar Inc.
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
Disclaimer: Trive South Africa (Pty) Ltd, Registration number 2005/011130/07, and an Authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 2002 (FSP No. 27231). Any analysis/data/opinion contained herein are for informational purposes only and should not be considered advice or a recommendation to invest in any security. The content herein was created using proprietary strategies based on parameters that may include price, time, economic events, liquidity, risk, and macro and cyclical analysis. Securities involve a degree of risk and are volatile instruments. Market and economic conditions are subject to sudden change, which may have a material impact on the outcome of financial instruments and may not be suitable for all investors. When trading or investing in securities or alternative products, the value of the product can increase or decrease meaning your investment can increase or decrease in value. Past performance is not an indication of future performance. Trive South Africa (Pty) Ltd, and its employees assume no liability for any loss or damage (direct, indirect, consequential, or inconsequential) that may be suffered from using or relying on the information contained herein. Please consider the risks involved before you trade or invest.
