Uncle Sam provides shaky base for Caterpillar

Cummins

31/10/2023 16:50

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Ben Winck
       WASHINGTON, Oct 31 (Reuters Breakingviews) -
U nfortunately for Caterpillar  CAT.N , Washington’s construction
race is looking less like a marathon and more like a sprint. The
$500 billion U.S. infrastructure spending bill, passed in late
2021, helped lift the firm’s third-quarter profit 41% from a
year ago. Yet the backlog for Caterpillar products fell. As with
other sharp pullbacks after government-supported pandemic
spending, Caterpillar will prove that counting on federal aid
isn’t a viable business model. 
    The Texas-based company’s headline figures gave investors
little to worry about. Profit of $2.8 billion was $339 million
above analysts’ forecasts, according to LSEG data. The company’s
CEO James Umpleby noted non-residential government construction
spending helped. And he expects the positive effects of
President Joe Biden’s bill to continue on to 2024. 
    Other forward-looking measures, however, raised concerns.
More trucks and bulldozers sat unsold at Caterpillar dealers,
pushing inventories $600 million higher. Sales volumes grew by
$351 million year-over-year, but that’s significantly down from
a $1.8 billion jump in the second quarter. And the construction
firms that order from Caterpillar appeared to step back, with
the company's backlog of deliveries falling $2.6 billion in the
third quarter.
    Not all of the cash from Biden’s infrastructure package has
been spent – some $300 billion remains, according to the U.S.
General Services Administration. Plus Umpleby noted that public
infrastructure projects in China may also help. The U.S. CHIPS
Act set aside $39 billion to help build semiconductor factories,
leaving more money for construction firms and, in turn,
Caterpillar. 
        But interest rates are rising, which is set to slow the
economy, and the company’s shares are already rich, with an
enterprise value 10.4 times its last year’s EBITDA, well above
peers Siemens  SIEGn.DE  and Cummins  CMI.N . Umpleby may be
benefitting from Uncle Sam now, but before long Caterpillar will
have to fend for itself. 
    Follow @BenWinck on X

    CONTEXT NEWS
    Caterpillar reported third-quarter earnings of $2.8 billion,
or $5.45 per share, on Oct. 31. Analysts surveyed by LSEG
forecasted a profit of $2.5 billion, or $4.75 per share. 

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Graphic: Caterpillar's share-price ceiling caves in    https://tmsnrt.rs/3FDC0gf
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 (Editing by Lauren Silva Laughlin and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  WINCK/ 
|ben.winck@thomsonreuters.com; Reuters Messaging:
ben.winck.thomsonreuters.com@reuters.net))