Caterpillar Earnings Impressed. Here’s Why Its Stock Is Dropping.

Caterpillar earth-moving equipment

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Caterpillar stock is slipping after the machinery manufacturer reported robust sales and earnings Friday morning. Unfortunately, inflation is rearing its ugly head.

Caterpillar (CAT) reported a profit of $2.60, beating estimates for $2.41, on sales of $12.9 billion, ahead of forecasts for $12.5 billion.

“Our dedicated global team remains focused on serving our customers, executing our strategy and investing for future profitable growth,” Caterpillar CEO Jim Umpleby said in a statement. “We’re encouraged by higher sales and revenues across all regions and in our three primary segments, which reflect continued improvement in our end markets.”

Caterpillar stock was off 3.5% at $205.23 at 10:31 a.m. in premarket trading. It was a good quarter, but rising costs seem to be hitting the stock.

Caterpillar management said in the news release that profit margins in the third quarter would “moderate” from the second quarter. What’s more, operating profit margins in the company’s construction and mining divisions slipped from the first quarter into the second quarter, going from 17.8% to 16.8%. Higher material costs, as well as higher R&D costs, hurt results.

Baird analyst Mig Dobre called the margin moderation “consistent with expectations and with [Baird] assumptions” in a Friday report. Still shares are weaker.

Rising commodity prices have been an issue for all manufacturers. Steel prices, for instance, averaged more than $1,500 a ton in the second quarter, up from about $1,200 a ton in the first quarter of 2021 and up from about $500 a ton in the second quarter of 2020. So far in the third quarter, steel prices are averaging about $1,800 a ton. The problem of rising costs isn’t going away.

The interesting thing for Caterpillar is higher commodity prices also drives sales of Cat machines. “Commodity prices remain supportive of growth,” said Umpleby on the company’s Friday morning conference call. “Parked large mining trucks decreased in the quarter and remain at relatively low levels in all regions as utilization increases.”

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And demand isn’t a problem. Sales into the construction and mining industries rose more than 40% year over year. Sales in both divisions grew sequentially compared with the first quarter, to $8.2 billion $7.8 billion.

Caterpillar stock had dropped 8.5% during the past three months and was up 17% so far this year. The S&P 500 has gained 5.8% during the last three months and 18% in 2020, while the Dow Jones Industrial Average has risen 3.7% during the past three months and 15% this year.

Shares are down about 14% from their June 52-week high of almost $247.

Write to Al Root at allen.root@dowjones.com

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