Here’s how Caterpillar is doing in 2022
At the time of this writing, caterpillarit is (CAT -0.63%) the stock price is down nearly 16% in 2022, and there have been ups and downs. The stock’s movements reflect the continued up/down trends in the market this year. Here’s a look at what’s happening, what investors can expect from Caterpillar this year, and why the stock reflects current investment conditions.
What happened to Caterpillar in 2022?
Caterpillar’s 2022 roller coaster saw a double-digit spring gain, followed by a sharp turnaround since early June. The reason: inflation and recession.
It’s no secret that commodity and raw material costs soared in late 2021 and early 2022 on strong demand from an economy recovering from supply constraints. related to COVID-19 lockdowns. A robust commodity price environment is a net positive for Caterpillar, which is a major player in the mining machinery and oil and gas equipment market. In addition, its construction equipment is used in activities related to raw material expenses, such as the construction of pipelines and buildings.
In June, the Federal Reserve’s determination to contain inflation through interest rate hikes as the European Central Bank entered a rate-tightening cycle , and a slowdown in growth in China caused a sharp turnaround in commodity markets.
As a result, speculative fervor came out of commodities such as oil, copper, iron ore and zinc, and the market wasted no time in selling Caterpillar shares. Add to that the possibility of a recession slowing construction markets, and Caterpillar’s outlook becomes even bleaker.
Caterpillar in the second quarter
This all adds up to a very challenging environment for Caterpillar in 2022. The significant reversal in raw material prices is likely to put pressure on sales for Caterpillar Independent Dealers, and they will prefer to reduce existing inventory before ordering from Caterpillar.
It’s getting worse. The previous surge in raw material prices will still be factored into Caterpillar’s costs.
Conclusion: final demand is weakening and costs, at least for now, remain high. Add to that the possibility of a recession hitting Caterpillar’s base construction end market, and the outlook deteriorates.
What to expect from Caterpillar in 2022 and beyond
Many industrial companies are likely to report similar conditions in the upcoming reporting season. Leaders can only report on what they see in front of them, so unless they’re feeling particularly prescient, it’s hard to expect too much optimism that conditions will change drastically anytime soon.
Besides the second quarter numbers themselves, the end market commentary and the retail sales update, investors should watch what management is saying about profit margin for the rest of the year. During the first quarter earnings call in April, Chief Financial Officer Andrew Bonfield told investors, “We expect margins to improve in the second half versus the first half and comparable period of 2021, as the impact of equities on prices accelerates.” It will be interesting to see if Caterpillar’s margin forecasts have changed.
Caterpillar can handle
In short, the short-term picture is not good. However, being too pessimistic about Caterpillar’s prospects would be a mistake. While commodity prices are currently falling, mining capital spending suffered a multi-year slump after 2013, and the industry needs to catch up. It’s a similar story with oil and gas investments. Additionally, many commodities, including copper, aluminum, nickel and oil, are still at levels significantly higher than they were before the pandemic. This should support investment.
Meanwhile, market interest and mortgage rates have fallen since the last rate hike by the Federal Reserve. This will help dispel fears that high rates will stifle construction investment for an extended period.
Plus, a slowing economy is probably just what she needs to ease supply chain stresses. Therefore, transportation costs and other supply chain costs could decrease significantly.
All in all, Caterpillar is expected to face a difficult 2022. Still, at its recent Investor Day, management maintained its expectation of $4 billion to $8 billion in free cash flow (FCF) through the cycle. With the company trading at a market capitalization of $90 billion, implying multiples from the lowest price to FCF of 22 times FCF to 11, Caterpillar looks like a decent value for investors willing to tolerate the risk at short term.