Three of our Club holdings — Caterpillar (CAT), Honeywell (HON) and Linde ( LIN) — are engaged in providing products and services that drive the industrial economy. They all reported strong first-quarter results Thursday. Here’s a rundown of the numbers and our analysis. Caterpillar shares turn around CAT YTD mountain Caterpillar YTD Dow component Caterpillar delivered a blowout first quarter. However, concerns about whether those results were as good as it will get for the machinery maker sent shares sharply lower early in Thursday’s session. We don’t agree with that view, and we would have been buyers of the weakness if we were not restricted from trading. Late in the day, CAT erased most of its losses as the broader market took off. Caterpillar revenue in Q1 increased 16.7% year over year to $15.86 billion, exceeding estimates of $15.26 billion, according to Refinitiv. Adjusted earnings per share (EPS) surged more than 70% to $4.91, crushing estimates of $3.78. Better-than-expected operating margin of 17% was so strong, due mostly to manufacturing costs that were not as high as expected as well as higher prices. Bottom Line on CAT This was a very strong quarter from Caterpillar as business continues to benefit from pricing power that outweighs costs. That, in turn, led to stronger margins and higher profits. Management sounded upbeat on the call about its demand trends and did not indicate a material slowdown, which the stock price had earlier suggested, was imminent. How could they when so much money tied to infrastructure spending is about to flow through to its backlog? A lot was being made Thursday about Q1 representing Caterpillar’s peak and the business will only get worse from here. However, we remain steadfast in our view that the billions of dollars earmarked by the government for infrastructure projects will prolong the cycle. Here are the Q1 numbers All three of Caterpillar’s physical product segments, as indicated in the table above, reported strong year-over-year revenue growth that beat estimates. Construction Industries sales in Q1 of $6.75 billion were up 10%. North America was up thanks to strong demand in both nonresidential and residential markets. But, China was weak due to low construction activity. China’s reopening after Covid has been a boon to many consumer-related stocks, but it hasn’t yet happened for Caterpillar’s above 10-ton excavator business. Resource Industries sales of $3.43 billion increased 21%. The company is seeing notable strength in mining. Heavy construction, quarry, and aggregate have been supported by infrastructure-related projects. Energy & Transportation sales of $6.25 billion increased 24%. Even with oil down in the quarter, Caterpillar continues to see a lot of activity and strength in new engine sales to customers. While the results were stellar, Caterpillar’s backlog remains a frustrating point for the market. A higher backlog indicates more sales are on the way, while a declining backlog suggests a slowdown could be coming. Caterpillar’s backlog ended the first quarter at $30.4 billion, about flat from last year’s Q4. A flat number gives the bears ammo in their view that the backlog has peaked and will go down from here. To be clear, that’s not our view. Based on the amount of business Caterpillar just recorded, we think a flat backlog suggests there is still a healthy level of demand. Additionally, Infrastructure dollars are only trickling in right now and only for smaller type projects, like reservicing roads. The flood of spending on bigger projects hasn’t even started yet, and it will support the backlog for quite some time. Dealer inventories is another forward-looking metric to monitor after this quarter’s $1.4 billion sequential build. This provided a $100 million favorable impact on total sales this quarter, but it will normalize in future quarters. While many in the market believe dealer inventory will be a headwind to Caterpillar down the road, management said on the call that it does not expect this at any time in the next few quarters. Guidance Caterpillar isn’t providing specific guidance for the full year, but management offered some color and commentary on the call. Thanks to the strong first quarter, management now expects revenue and EPS to be even higher than previously anticipated, with adjusted operating profit margin at the high end of its guidance range. For Q2, Caterpillar expects higher sales but lower margins compared to the first quarter, typical of historical seasonality. Pricing will be less of a year-over-year tailwind as the company laps last year’s increases. Honeywell beats, lowers guidance HON YTD mountain Honeywell YTD Honeywell kicked off 2023 with a surprisingly strong first quarter as sales and earnings, segment profit margin expanded more than expected and organic growth nearly doubled with Street estimates. Shares of Honeywell rose roughly 4% on Thursday. Revenue in Q1 rose 5.8% year-over-year to $8.86 billion, exceeding analyst estimates of $8.52 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) of $2.07 advanced 8.4% annually and was well ahead of the $1.93 consensus estimate. Segment margin, similar to an adjusted operating income margin, expanded 90 basis points year-over-year, to 22%, also ahead of expectations. Bottom line on HON In addition to the strong headline results, Honeywell exited the quarter with a record $30.3 billion backlog, up 6% versus the year-ago period, driven by strength in its Aerospace division and its Performance Materials and Technologies unit. Honeywell’s full-year sales and earnings forecast came in ahead of what the Street was looking for. While we like what we’re seeing, we are maintaining our 2 rating on the stock for the time being as the macroeconomic backdrop remains uncertain. While Aerospace demand appears robust, revenue continues to be constrained by supply chain challenges. As a result, we are trimming our price target on Honeywell to $225 per share from $235. Here are the Q1 numbers Driving the 14% organic sales growth in Aerospace in Q1, as seen towards the bottom of the table above, we saw the eighth straight quarter of double-digit organic sales growth in commercial aviation and a return to growth in defense and space. Honeywell Building Technologies was up 9% organic, on the back of building projects, which were up over 20% organically, the fourth consecutive quarter of double-digit growth. Performance Materials and Technologies advanced 15% organically, led by 19% organic growth at UOP, which is Honeywell’s petrochemicals business. Safety and Productivity Solutions sales declined 11% organic as a result of a decline in warehouse automation projects. Offsetting some, profit margin for the unit expanded significantly. Guidance Looking ahead, management’s Q2 sales and earnings forecasts came up short of expectations — $9.1 billion and $2.20 per share at the midpoints, repeatedly. However, management’s full-year sales and earnings forecasts were raised to levels above what Wall Street was looking for — $36.9 billion and $9.13 per share. Linde price target raised LIN YTD mountain Linde YTD Industrial gas and engineering giant Linde reported solid first-quarter results before the opening bell Thursday. While sales came up short of expectations, earnings, operating margin, and return on capital all notched new record highs despite the difficult operating environment. Revenue in Q1 of $8.19 billion was about flat versus the year-ago period and just shy of estimates compiled by Refintiv. Adjusted earnings per share (EPS) of $3.42 — up 17% year over year — exceeded the $3.13 estimate and it was well above the company’s own guidance of $3.05 to $3.15. Adjusted operating profit rose 16% to $2.21 billion, beating expectations of $1.96 billion. Bottom line on LIN Linde shares were little changed Thursday, which can be attributed to profit-taking. The stock came into the print hovering around all-time highs. As indicated by record-setting adjusted operating margin of 26.9%, EPS, and return on capital of $1.47 billion to shareholders through dividends and stock repurchases, Linde is firing on all cylinders. In fact, excluding the impact of foreign exchange, earnings increased 20% versus the year-ago period, marking the 10th consecutive constant currency EPS growth of 20% or more. Management said it’s working to further optimize the business and believes that as global economies recover, there will be additional opportunities to enhance operating leverage. At a higher level and looking further out, Linde stands to be a primary beneficiary of the world’s move to clean energy. Management said on the call that decarbonization project opportunities are “likely to exceed $50 billion over the next decade … in one of the best long-term growth environments [they’ve] seen in a long time.” Given the strong results and positive outlook, we are raising our price target to $390 per share from $370. We are hesitant to buy shares trading near record levels. But, stocks also don’t make all-time highs by accident. So, with the future outlook bright for both this year and beyond as global decarbonization efforts ramp up, we are comfortable reaffirming our 1 rating . Here are the Q1 numbers We saw gas sales growth, above estimates, across all end markets in all operating regions. Engineering sales of $540 million were down versus the year-ago period. But, much of that was due to not yet lapping the impact of sanctions on Russia for invading Ukraine, which led to Linde’s cessation of operations there in the second quarter of last year. Guidance Looking ahead, EPS guidance for the second quarter and full year both came in ahead of expectations at the midpoints of $3.45 and $13.65, respectively, reflecting the Q1 outperformance. Management left expectations for the rest of the year unchanged — based on, as always — the assumption of no economic improvement. (Jim Cramer’s Charitable Trust is long CAT, HON, LIN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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A worker washes a Caterpillar crawler dozer at Ideal Tractor in West Sacramento, California, on Monday, Aug. 1, 2022.
David Paul Morris | Bloomberg | Getty Images
Three of our Club holdings — Caterpillar (CAT), Honeywell (HON) and Linde (LIN) — are engaged in providing products and services that drive the industrial economy. They all reported strong first-quarter results Thursday. Here’s a rundown of the numbers and our analysis.