China helps lift Caterpillar shares to two-year high
Equipment giant sees turnaround on horizon
After four straight years of declining sales and a government tax investigation announced l ast month, Caterpillar Inc. investors are being rewarded for their patience.
The shares touched the highest in more than two years on Tuesday after the machinery- maker raised its forecast for 2017 sales, as China’s economy improves and demand in energy and transportation increases. Caterpillar boosted revenue forecasts on Tuesday to a range of US$ 38 billion to US$ 41 billion. First- quarter earnings and sales also topped expectations.
An i mproving outlook adds to signs that Caterpillar’s long- awaited turnaround may be at hand after it cut costs to ride out a slump in demand from the mining and energy industries. China’s economy has accelerated for two- straight quarters, brightening sales prospects. The forecast offers investors good news at a time when a U. S. criminal probe into the company’s offshore dealings has weighed on the stock.
“Clearly, encouraging signs are emerging that CAT’s end markets are finally turning around following a very challenging four- year period,” Matt Arnold at Edward Jones & Co. said in a note. “We view today’s news as a solid positive for the stock.”
The results come days after Nucor Corp., the biggest steelmaker in the U. S., said that it is seeing renewed demand growth in China.
“Sales in Asia/Pacific were higher as a result of an increase in end- user demand, primarily in China, stemming from increased government support for infrastructure and strong residential investment,” Caterpillar said in a statement.
This increase was partially offset by an unfavour- able impact from changes in dealer inventories, primarily in China, which were about flat in the first quarter of 2016 and decreased in the first quarter of 2017.
On Monday, Caterpillar reported its first increase in three- month retail machine sales since 2012, led by gains in the Asia-Pacific region.
“We’re starting to feel better about things than maybe even about f our months ago,” chief financial officer Brad Halverson said. He said that China’s “tremendous” surge in demand in the quarter was “more than we expected.”
Earlier this month, Goldman Sachs Group Inc. added Caterpillar to its “conviction” list of highly recommended stocks. The bank cited machinery markets in the early stages of recovery and a change in the company’s strategy toward improving returns on capital rather than boosting market share.
Gross domestic product in China increased 6.9 per cent in the first quarter from a year earlier, compared with a 6.8- per- cent median esti- mate in a Bloomberg survey. It was the first back- to- back acceleration in seven years.
“There are encouraging signs, with promising quoting activity in many of the markets we serve and retail sales to users turning positive for both machines and energy & transportation for the first time in several years,” chief executive Jim Umpleby said in the statement.
Umpleby said while Caterpillar is raising its full- year outlook, “there continues to be uncertainty across the globe, potential for volatility in commodity prices, and weakness in key markets.” The firm said that in North America, demand for new equipment has remained low because of “weak infrastructure development” and customers relying on existing equipment.
“Most people have seen enough evidence that the environment is turning from brutal to positive again,” Edward Jones’s Arnold said in a telephone interview before the earnings results were released. “Between Caterpillar’s machinery numbers and other indicators and metrics, the industrial economy globally looks like it’s getting better, and Cat is going to harness that.”
Caterpillar rose 7.86 per cent to close Tuesday at US$ 104.42 a share in New York.