Caterpillar (NYSE: CAT) shares tanked following the Q2 earnings release, but the move may turn out to be an opportunity for investors. The stock is trading at the bottom of a range that has provided strong support in the past including sell-side support. Both the institutions and analysts are buying the stock on a net basis although the underlying activity is mixed and driving volatility. The institutions, for example, have been net buyers for only 2 of the last four quarters but picked up shares in an amount worth 3.2% of the current market cap. Their holdings are up to 67.44% and growing based on the trends and the outlook.
Caterpillar Pulls Back After Mixed Results
The analysts are equally mixed in their views, although the net results is firming sentiment and a narrowing range for price targets. The 15 analysts with recent coverage are rating the stock a Moderate Buy which is up from last year’s Hold and the price target is up as well. The takeaway from the price target is that consensus is down from a peak set earlier this year but still 23% above the recent price action and it is firming in the very near term. It’s early for the post-earnings release analysts' commentaries to come out, but they should signal more of the same.
Caterpillar Has Mixed Quarter, Guides For Growth
Caterpillar had a mixed quarter in regard to the analyst's estimates but a good quarter nonetheless. The company reported $14.2 billion in consolidated revenue, which missed the consensus by 130 basis points but grew 11% versus last year. The gains were driven by both pricing and volume, which is good news, although rising costs in key segments cut into the bottom line results. On a product-mix basis, equipment sales were weak and offset by growth in the services segments, while on a regional basis, North America and Latin America led with double-digit gains. APAC grew by a smaller 3%, and EAME fell by 3% to offset the strength in NA and LA.
In regard to the margin, there was some margin weakness in key segments Construction and Energy/Transportation, but that was offset to some degree by strength in others. The end result is a 30 basis point contraction in the operating margin that left the adjusted operating income up only 9% versus the 11% system-wide gain posted on the top line. The takeaway, however, could be the guidance which is forecasting both revenue and margin growth versus last year, and revenue growth will continue to be supported by volume.
Caterpillar’s High-Quality Dividend Is Growing Too
Caterpillar is fairly-valued relative to the S&P 500, trading at 15.5X its earnings, but it has a better-than-average dividend. The stock is yielding about 2.35% at current levels and it comes with a favorable outlook for growth. Not only are the company’s earnings growing, but the 19-year history of increases and low 40% payout ratio suggests another 19 years of modest increases is easily doable.
The Technical Outlook: Caterpillar Falls To Support
Shares of Caterpillar fell more than 3.5% following the earnings report, but the bottom may already be in. The stock fell to a key support level, and support was met before touching that level. Support appears to be at the short-term moving average near $186.75, indicating a possible reversal. A rebound could begin relatively soon if the stock can hold this level. If not, the price action could fall below $186 and back down to the $170 level, where it would be a better value and higher yield.