Caterpillar Doing Better than Expected Through Second Quarter

Caterpillar reported, on Tuesday, second quarter earnings have been better than expected, pushing up 5 percent in premarket trading before the bell. Now the agriculture equipment manufacturer has raised its full-year guidance to $5.00 per share, up significantly from its previous outlook—$3.75 per share—on the heels of what the company is calling “disciplined” costs through the first half of the year that allowed for the pursuit of new investment opportunities.

The second quarter bump in sales, though, was largely driven by more construction in China and demand for aftermarket parts in the mining and energy sectors. This, the company says, is a sign that both of those industries on the verge of rebounding: older equipment is wearing out and those companies who wish to keep working are going to have to invest in upgrades.

According to Caterpillar CEO Jim Umpleby, “While a number of our end markets remain challenged, construction in China and gas compression in North America were highlights in the quarter. Mining and oil-related activities have come off of recent lows, and we are seeing improving demand for construction in most regions.”

He also notes, “We anticipate making targeted investments in initiatives…including enhanced digital capabilities and accelerating technology updates to our products.”

Indeed, Bloomberg Intelligence analyst Karen Ubelhart notes, “The aftermarket parts increase mean they’ll have more equipment demand to follow, so that piece hasn’t even kicked in yet. Caterpillar is saying that the recovery is happening, that they have a lot of confidence. Dealers are clearly feeling better, and that’s telling you that customers are starting to buy.”

Of course, this has not been an easy feat for the company, perhaps more known today for a half dozen or so legal issues—including a profits investigation by the Internal Revenue Service—they have been trying to fight off. As a matter of fact, the company is still recovering form a law enforcement raid of its Peoria (Illinois) facility which dramatically sunk the stock.

Previously, Caterpillar had said it is “vigorously contesting” a tax and penalty package worth about $2 billion that was originally proposed by the IRS. Caterpillar assures that the relevant transactions had, in fact, “complied with applicable tax laws and did not violate judicial doctrines.”

The true test for Caterpillar will, quite likely, be sustainable. They will need to hold strong as costs get tighter and tighter but also as industry comparisons also continue restraints.

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