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Earnings Results: What recession? Caterpillar keeps repeating that demand is ‘healthy,’ ‘strong’ and ‘robust’

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In case there was any doubt, Caterpillar Inc. executives said about a dozen times on one conference call that demand remained ‘healthy,’ ‘strong’ and ‘robust.’

Shares of the construction- and mining-equipment maker
CAT,
+8.06%

shot up 8.9% in afternoon trading toward a 4½-month high, after the company reported third-quarter profit and sales that rose above expectations.

The stock, which was seeing its biggest-ever price gain of $17.49, based on FactSet data going back to 1972, added about 115 points to the Dow Jones Industrial Average
DJIA,
+0.82%
,
which was up 344 points.

When asked by William Blair analyst Larry De Maria on the post-earnings conference call whether the company is concerned about a potential recession or is doing anything to prepare for one, Chief Executive Jim Umpleby appeared to shrug off recession fears.

He acknowledged that the company is closely monitoring the macroeconomic environment but said that since laying out a “competitive and flexible” cost structure back in 2017, it has demonstrated that it can take action when needed.

“Having said that, as we sit here today, we continue to see healthy demand across most of our end markets,” Umpleby said, according to a FactSet transcript.

He reiterated later in his answer that the company continued to see “healthy demand.”

In the call’s prepared remarks and the question-and-answer period, executives used the word “healthy” to describe demand at least seven times, “strong” or “stronger” no fewer than four times and “robust” once.

Umpleby’s assertions come as many signs suggest the economy is slowing and risks of a recession are growing. The chief executive of fellow Dow component McDonald’s Corp. MCD, Chris Kempczinski, said Thursday in the fast-food giant’s post-earnings conference call that he expects a “mild to moderate recession” in the U.S.

Caterpillar’s Umpleby did say that there has been “some softening” in demand for products that support residential construction, but that, he said, comes from a situation in which demand “has been very strong.”

He noted that residential construction only accounts for about 25% of sales in Caterpillar’s Construction Industries (CI) business segment, while the rest is nonresidential construction, which he said remains “more resilient.” Overall, CI revenue accounted for 41.9% of total revenue.

“But again, demand for our products in CI at a macro level still remains quite robust,” Umpleby repeated.

It’s not too unusual for Caterpillar to stress a theme in a post-earnings call by repeating certain words and phrases.

In the call following the company’s second-quarter earnings report, which led to a 5.8% drop in the stock that day, the company said that demand remained “healthy” and “strong” but also used the words “challenges,” “constraints,” “disruptions” or “pressures” a total of 19 times to describe the supply-chain situation.

Caterpillar’s stock has soared 15.8% over the past three months, while the Dow is little changed.

The earnings numbers

Before Wednesday’s open, Caterpillar reported third-quarter net income that rose to $2.04 billion, or $3.87 a share, from $1.43 billion, or $2.60 a share, in the same period a year ago.

Excluding nonrecurring items, such as restructuring costs, adjusted earnings per share increased to $3.95 from $2.66, well above the FactSet consensus of $3.16.

Revenue grew 20.9% to $14.99 billion, beating the FactSet consensus of $14.36 billion.

Among Caterpillar’s business segments, Construction Industries revenue rose 19.4% to $6.28 billion, above the FactSet consensus of $5.99 billion; Energy and Transportation revenue increased 21.8% to $6.19 billion, beating expectations of $5.55 billion; and Resource Industries revenue was up 30.5% to $3.09 billion, outpacing expectations of $2.96 billion.

Operating profit margin improved to 16.2% from 13.4% and total costs increased less than sales, rising 17.1% to $12.57 billion. For the fourth quarter, the company expects operating profit margin to be “significantly” higher than a year ago and “slightly” higher than in the third quarter.

Inventories continued to increase and were valued at $16.86 billion as of Sept. 30, up from $15.88 billion at the end of the second quarter and $15.04 billion at the end of the first quarter.

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