Caterpillar Goes From Dow Top to Flop

The Takeaways From Caterpillar's Fourth-Quarter Earnings

It looks like a case of buy the rumor, sell the fact.

Caterpillar Inc. surged 70 percent last year, making it the best bet on the Dow Jones Industrial Average after Boeing Co., as investors anticipated accelerating global demand this year. But a day after the machinery giant confirmed that outlook, it’s the Dow’s worst performer, with a 2.1 percent drop on Friday.

Bullish Indicators:

  • Caterpillar reported better-than-expected sales and earnings for the fourth-quarter, and projected 2018 profit that topped analysts’ estimates
  • Through Wednesday, a day before the company’s earnings data was released, the stock was the best performer in the Dow Jones gauge the past two years
  • Improving economies from China to Latin America have lifted demand Caterpillar’s signature yellow mining and construction machines
  • Free-cash-flow growth on tax changes and strong end-market growth should provide significant opportunities for “shareholder friendly” capital allocation,” according to JPMorgan Chase & Co.

Bearish Indicators:

  • Stock traded flat on Thursday after the report; William Blair & Co. analyst Larry De Maria cites supply-chain concerns, lack of revenue guidance, high expectations, played-out catalysts, and trade and currency concerns
  • Investors appeared to struggle with whether the guidance was good enough, according to Wells Fargo Securities LLC
  • NOTE: Company said Thursday that it will no longer provides sales outlook
  • “Sequentially margins declined slightly on higher revenue, that’s never good,” Stephen Volkmann, an analyst at Jefferies LLC, said in a telephone interview. “I can understand where people start to think we’re in mid cycle”
  • “There was a run-up into the quarter and the stock has done great, so I think a lot of that tells you it was a little bit of an overbought stock,” Volkmann said
  • “When it comes to very short-term investors who position around events like quarterly earnings, sometimes it’s buy on the rumor and sell on the news,” said Matt Arnold, an analyst at Edward Jones & Co.

— With assistance by Esha Dey

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